Another strenuous year for business

Kudzai Kuwaza

The year 2019 has been another difficult year for the business sector in Zimbabwe, due to prolonged power cuts, acute shortage of foreign currency, reduced production and runaway inflation.

Government in February abandoned the 1:1 exchange rate between the surrogate bond notes currency and the United States dollar, adjusting it to US$1:zw$2,50.

The foreign currency interbank market was introduced to facilitate the availability of foreign currency particularly for companies and exporters.

However, these two measures failed to stimulate the economy as companies failed to access adequate forex needed for its operations from the facility. Despite an admission by Finance minister Mthuli Ncube that the interbank market needed to be improved, challenges in accessing adequate foreign currency persist.

The adjustment of the exchange rate worsened the skyrocketing of prices as the local unit rapidly lost value against the US dollar. As the demand for the greenback in the economy increased due to its ability to restore value, civil servants began demanding to be paid in forex, a demand government rejected.

Under enormous pressure from a self-redollarising economy, government through Statutory Instrument 142 of 2019 banned the multi-currency regime and made the local unit the sole legal tender on June 24. Although the conditions for the introduction of the local currency were not ideal, the government forged ahead with the plans.

Low inflation, import cover of six months and a sustainable gross domestic product growth rate of at least 7% have not yet been achieved. This quickened annual inflation, which has skyrocketed to more than 400%.

Business consultant Simon Kayereka said 2019 was probably one of the worst years for business.“It was annus horribilis for business with inflation and suppressed demand compounded by the fuel and power crisis,” he said. “ The Statutory Instrument 142 also derailed business. The drought and Cyclone Idai did no spare business either. It was all in all a terrible year for business.”

Costs of production have continued to soar as companies source foreign currency on the parallel market. At one point, the Confederation of Zimbabwe Industries (CZI) warned that companies could be forced to halt operations if government failed to arrest the crippling currency crisis within 10 days after most companies were left with less than a month’s stock of raw material.

Industry woes persisted in 2019 due to crippling power cuts. Most companies had to resort to night shifts and using diesel-powered generators, a development that added to the cost of doing business. Many jobs were lost as companies scaled down drastically as a result of power outages which last up to 18 hours daily.

Some economists have pointed out that the economy at one point during the year was losing between US$150 million and US$200 million weekly due to the prolonged electricity crisis. Reserve Bank of Zimbabwe governor John Mangudya revealed that diesel consumption has gone up by 20% to 3,6 million litres daily due to the rolling power cuts.

The 2019 survey report by the Zimbabwe National Chamber of Commerce (ZNCC) on the impact of energy challenges on business painted a grim picture of the state of production in the economy. Unrelenting power cuts and fuel shortages have devastated the local economy, with the value of exports and production capacity taking a huge knock. Foreign currency receipts for the first half of 2019 dropped to US$2,6 billion from US$3,4 billion in the corresponding period in 2018.

Capacity utilisation also fell drastically during the period under review to below 40%.The mining sector has not been spared the impact of the power cuts. The mining industry, which requires uninterrupted power supply, was getting four days of power per week, with some mines going without power for a whole week, resulting in widespread losses. Production statistics for the first four months of 2019 show that all key minerals recorded output declines of no less than 10% compared to the same period in 2018 due to power outages.

Gold production suffered a massive plunge in the month of June this year with a huge decline in deliveries of the mineral.Gold delivery statistics show that the total amount of gold delivered to Fidelity Printers, which is the sole buyer of the mineral, nosedived from 2 323 kilogrammes in May 2019 to just 1 658 kilogrammes in June. The drastic decline was most prevalent among small-scale producers.

Deliveries from small-scale producers, who bring more gold deliveries than large-scale producers, reduced from 1 278 kilogrammes in May to just 687 kilogrammes in June. This was attributed to the uncompetitive forex retention scheme of 55% by the central bank as well as the power outages.

This casts serious doubt on the government’s objective of meeting the US$12 billion production target for the sector by 2023.Blue chip counters on the local bourse such as PPC Ltd, National Foods Ltd, and Delta Corporation Ltd experienced one of their worst trading spells for the period ending September 30, 2019 characterised by losses and dwindling sales.

Beverages manufacturer Delta recorded a 48% decline in lager beer volumes during the half- year period ended September 2019 from 1,04 million litres the previous year. In January, the brewer announced that it faced the gloomy prospect of halting all its business operations owing to a crippling foreign currency shortage that has paralysed the economy. During the same period, National Foods posted a 36% decline in volumes as inflation quickened, coupled with diminishing consumer purchasing power.

Flour volumes were most heavily impacted, closing 50% below the previous year. Volumes performance in the groceries (mainly rice and salt) tumbled by 47%, snacks and treats tumbled by 37%, with stockfeed sales dropping by 25%, as consumers switched to more affordable commodities on the market.

Cement manufacturer PPC Limited’s revenue declined by 12% to R4,94 billion (ZW$4,9 billion or US$346 million) compared to the previous year’s R5 597 million (ZW$5,6 billion or US$391 million) as sales took a 17% tumble to close at 2,6 billion tonnes.

Zimbabwe National Chamber of Commerce chief executive Chris Mugaga said 2019 was difficult but also opened up opportunities for enterprising businesses to fill in the gaps.

“Power cuts, forex shortages and the crowding out of private funding were the three greatest challenges and threats in 2019,” Mugaga said. “The printing of the ‘US dollar’ by increasing money supply backfired in an ugly way.”

Despite government making efforts to establish the Zimbabwe Investment Development Agency, a number of companies expressed reservations of the country’s investment climate.

Chinese company Sunny Yi Feng Tiles Zimbabwe, which has invested US$50 million in its Norton-based tile production factory, decided to abandon its ambitious expansion plans, citing persistent harassment and property rights violations by bribe-seeking politicians and government officials, in a case which has strained Sino-Zimbabwe relations.

Chinese financial institutions have indefinitely suspended funding three big infrastructural projects totalling US$1,324 billion after government raided and diverted US$10 million from an escrow account for the Robert Mugabe International Airport expansion project, a major setback to the government’s investment drive.

The banking sector was plunged into crisis after Mauritian payment platform Paynet sued local banks after they refused to pay for its services in foreign currency, threatening the processing of RTGS payments by financial institutions.