HomeBusiness DigestThe industry breathing better, but . . .

The industry breathing better, but . . .

THE Confederation of Zimbabwe Industries (CZI) recently released the manufacturing sector survey report which showed that capacity utilisation in the industry grew from 36,4% recorded in 2019 to 47% achieved in 2020.

Victor Bhoroma
analyst

The growth was largely driven by increase in sales, improved availability of power and foreign currency generation which positively impacted retooling.

The 11% growth in capacity utilisation was achieved despite the challenges posed by Covid-19 restrictions, which inflicted revenue losses, logistical challenges, disruptions to the local supply chains and international trade.

Trade statistics also show resilience for the local economy with exports growing marginally by 5,8% to US$4,9 billion in 2020.

The consistency in the availability of power and fuel has allowed the industry to maximise on production and meet orders.

Capacity utilisation is expected to rise to 61% in 2021, provided there is consistency in government policy, marked decline in inflation, currency and exchange rate stability which directly boost consumer spending.

The central bank introduced the foreign currency auction system on June 23, 2020 and over US$900 million has been allotted since the auction began. The mechanism has played a significant role in channeling foreign currency to the productive sector where 70% of the total foreign currency has been allocated to the importation of raw materials, machinery, spares and equipment.

The auction system also assisted in stabilising of prices (dampening inflationary pressures) and minimising distortions of indexing prices using the volatile parallel market exchange rates.

After the introduction of the foreign exchange auction system, annual inflation dropped from 838% recorded in July 2020 to 349% recorded in December 2020 and 322% recorded in February 2021.

The local economy has regressed back to the multiple currency system, where the Zimbabwean dollar is largely used a daily transitory currency, while the United States dollar is the preferred currency for forward pricing, contracts, asset disposal and savings.

The multi-currency model has allowed various producers and retailers to receive foreign currency directly from the consumers, thus significantly reducing pressure on the parallel market. There is hope that consumer confidence will gradually improve with the sustenance of the current monetary policy framework.

Despite the improvements in the trading environment which has allowed the industry to breathe, a number of risks and constraints lie ahead. These include:

Increase in production costs

The recent increase in fuel prices to over US$1,30 per litre for petrol and US$1,32 per litre for diesel makes Zimbabwe’s fuel the most expensive in Southern Africa (and one of the most expensive in Sub Saharan Africa).

For every litre of fuel sold inland, the government collects over US$0,50 in taxes and levies before VAT, Income Tax and other levies are charged (mostly in foreign currency) on petroleum or distribution entities that make up the value chain in petroleum distribution.

Besides the heavy tax burden on fuel, the high cost of doing business also takes into account uncompetitive road haulage costs, import and export permit fees, electricity, council rates and property rentals that upsurge the cost of production for the industry. The result is that manufactured exports from Zimbabwe become uncompetitive, which discourages value addition in the industry.

The current taxation and trade policies are the biggest deterrent to import-substitution. As such, there is need to reduce excise duty paid on fuel, as the cost of fuel heavily feeds into the cost of production across all economic sectors.

Similarly export permit fees and other bureaucratic procedures on importation of raw materials should be scrapped to reduce production costs.

Foreign currency shortages

Even though the foreign exchange auction market has significantly improved the allocation of foreign currency to the productive sectors of the economy, there is still a huge supply gap that will continue to exert pressure on the local currency and sustain the parallel market.

So far the auction market is allocating approximately US$135 million per month versus at least US$420 million required to import various commodities into the country.

The huge disparity means that the parallel market remains king and is the preferred medium for the exchange of free funds in the economy.

The opening of land borders to cross-border traders and small business merchandise importers will deepen foreign currency shortages and widen the spread between the formal and informal rates.

Policy inconsistency

The worst fear for the local industry is the overnight changes in government policies that significantly affect the investment and business climate in the economy.

The use of hurried Statutory Instruments (SIs) and constant changes to the country’s monetary, and foreign exchange regulations make long-term planning impossible.

Foreign investors still find it difficult to formally repatriate their dividends from local banks.

This affects the scale of foreign investment inflows into the industry. Similarly, the financial sector has been reluctant to offer any meaningful loans to the industry for retooling as high levels of inflation induce significant losses for lenders.

According to historical estimates done by CZI, the industry requires over US$2,2 billion for recapitalisation in order to operate at optimum levels. The liquidity challenges in the local market, characterised by high interests in real money, mean that the industry will continue to operate below optimal levels, with current obsolete equipment.

It also means value-addition and beneficiation policies remain mere blueprints which cannot be matched by government reforms and capital injection by shareholders in the sector.

Influx of dumped merchandise

The downside of using the multiple currency regime is that foreign merchandise is dumped and smuggled into the country to the detriment of the local industry.

Additionally, the economy continues to slide into informalisation with the informal businesses now constituting an estimated 70% of the economy.

The billions in foreign currency traded in the informal market is hardly banked and often escapes the local hostile regulations for stable financial markets regionally and internationally.

To protect the local industry, import policies should incentivise importation of raw materials, equipment and machinery that adds value to the economy instead of finished goods.

Similarly, the government should enforce stricter controls at the border to ensure that all finished goods pay appropriate and standard import duties.

Anti-dumping controls are also long overdue especially for imports such as electrical gadgets, home appliances, plastic ware, blankets, auto parts and clothes among others

The local industry has significantly benefited from the foreign exchange auction market. It has also benefitted from improved usage of the US dollar and stability in energy provision.

However, there are a lot of constraints that are scuttling optimum production and likely to derail the 61% capacity utilisation target. Consumer demand still remains weak due to depressed incomes and there is uncertainty over possible future currency changes as the country slides into the 2023 election year.

A tight control for money supply growth, cuts to quasi-fiscal operations and restriction of government spending to collectable tax revenues remain vital pieces to economic stability.

The local environment remains fragile and uncertain. The local industry has room to grow, provided the policy framework is oriented towards supply side intervention.

Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.

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