HomeLocal NewsForex constraints to retard growth in 2021

Forex constraints to retard growth in 2021


INDUSTRIAL capacity utilisation growth will slow down to about three percentage points at the end of 2021 compared to a 10,6 percentage gain in the prior year, on account of foreign currency shortages and a diminishing purchasing power, as the impact of the Covid-19 takes toll.

This is in sharp contrast to industry lobby group, the Confederation of Zimbabwe Industries (CZI), which projects the manufacturing sector’s capacity utilisation will grow by 14 percentage points in 2021 to close the year at 61% from the 2020 level of 47%.

In 2019, the economy had problems linked to a July 2018 disputed election that resulted in army killings and denting confidence in the Zanu PF government which had gained some traction globally on its re-engagement agenda and the “Zimbabwe is open for business” mantra.

Confidence hit a historical low with massive capital flight witnessed on the Zimbabwe Stock Exchange (ZSE), where foreign investors dumped the local bourse.

Electricity and water shortages, coupled with an acute liquidity crisis since 2015 when the United States dollar vanished from formal circulation spelled doom for a manufacturing industry that struggled to replace antiquated equipment due to lack of capital.

In 2020, CZI said industry enjoyed the benefits of an improved availability of foreign currency on the Reserve Bank of Zimbabwe (RBZ) auction system that started midyear. However, Covid-19 related travel restrictions and tight border controls made importing cumbersome.

“Capacity utilisation rose by 11 percentage points to 47% in 2020 from 36,4% in 2019 (due to) improved foreign currency availability, increased sales, re-tooling,” CZI chief economist Tafadzwa Bandama said.

She projected capacity utilisation to rise to 61% this year, saying the vaccination programme that kicked off three weeks ago will likely spur economic activity, as the economy opens up from months of lockdowns to contain Covid-19.

Companies, Bandama said, have also said they were kept much busier last year because the local market demanded more domestic products after borders were closed by governments to contain the pandemic.

“The official exchange rate became the major determinant in the pricing equation. It is encouraging to note that business can now access foreign currency through the formal channels although it’s now taking longer to access foreign exchange,” she added.Experts, however, argue that achieving capacity utilisation under the current conditions is overly optimistic.

Economist Chenai Mutambasere questioned the CZI’s research methodology, calling it flawed and far from reality particularly given its exclusion of the informal sector which has been hit the hardest by the national lockdowns and sidelined on the forex auction system in favour of the more established players.

Markets analyst Evonia Muzondo said although growth in capacity utilisation is certain, hitting the 60% mark is an uphill task in the face of a number of challenges in the economy, particularly lack of foreign currency as the auction system struggles to meet growing demand.

“Getting to 60% is an uphill task mainly due to forex shortages at the auction system, when the economy fully opens up with the end of the lockdown, the demand for forex surges. Now, the allocations being made are taking too long and the platform has a backlog as you also witnessed last year even though economic activity was very low at the time.

“Businesses need forex to import when they start operating fully and again the power and fuel costs have just gone up,” Muzondo said.
She also said the domestic market is now too broke to afford enough consumption to drive further significant growth.

“Even if capacity utilisation goes up, where are they going to sell their products because people’s incomes have largely been eroded by the weakening local currency and the Covid-19 challenges?”
Muzondo said while there is a possibility of growth, as a result of a positive agricultural season, it is minimal.

“There is, however, a decent possibility of positive performance given that there are good rains. Agriculture feeds a lot into other sectors in terms of raw materials, so with these rains, the hope is that the output is good,” she said.

“If, or when, that happens there is a positive effect. Remember that when agricultural produce is good and farmers get paid, they drive consumption locally because the sector accounts for the bulk of labour in any case.”

Muzondo predicted that capacity utilisation this year would be, at best, 50%.She said while import-substitution is a positive out of closing borders, delays of up to six weeks in accessing raw materials will negatively affect industry.Economist Prosper Chitambara also said the 61% projection is too ambitious.

“I think it’s optimistic, but it’s achievable, especially given that we were coming from a very low base and we have seen significant improvement in the market in terms of availability of foreign currency and also the good rains are a boon for the industrial sector, so I think it is definitely possible, although I am not quite sure of the numbers,” he said.

“When agriculture performs, then the rest of the industry normally benefits.”Chitambara said much of the success of industry and the rest of the economy in 2021 was now depended on the success of vaccination programmes given that threats of a third and potentially worse wave are rife.

“With the vaccination rollout, the hope is that the country would be able to get Covid-19 under control, which is a positive, so the hope is there may not be another third wave.”

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