ANALYSIS: Economy Facing New De-industrialization Wave
Zimbabwe’s hyperinflation and the general economic decline are now posing serious viability challenges for the local industry. This will be a second phase of de-industrialization in a space of 2 decades after the 2007-2008 economic meltdown. As the country’s treasury department has all but confirmed that the economy is set to contract by at least 6.5% in 2019. The confederation of Zimbabwe Industries (CZI) projects that the manufacturing capacity utilization in the sector will slump to less than 30% in 2019 from the 48% recorded in 2018 due to negative macro-economic factors that have hit the country since end of 2018. This will be the first time in 10 years for the industrial output measure to fall below the 30% mark.
By Victor Bhoroma
Key production challenges for the local industry include drought and climate change effects that affect agricultural productivity. Agriculture has strong backward and forward integration to the manufacturing sector where it provides 60% of industrial raw materials in form of agricultural inputs, therefore a slump in agricultural productivity directly impacts industrial capacity. Other challenges include hyperinflation, exchange rate volatility, electricity and water shortages, acute foreign currency shortages, increased cost of doing business and the resultant drop in aggregate demand due to income erosion. Incomes in the country have been eroded by hyperinflation and consumer demand has slumped as a result. Official inflation figures from the government show that annual inflation is now over 353% and prices on the local market continue to increase at alarming rates, headlined by weekly fuel price reviews from the Zimbabwe Energy Regulatory Authority (ZERA).
The persistent electricity shortages have significantly reduced production time and production output in the country’s key industrial sites with most producers reportedly operating on single shifts averaging 6 hours per day. To augment and keep up with orders, producers have been resorting to diesel powered generators which have become costly to run due to constant fuel price hikes. A well serviced 500kVA industrial generator requires 100 Litres/Hour to run on full load and this translates to Z$1600/Hour (US$100/Hour using the interbank rate) in production cost on diesel alone. It is almost impossible for local producers to compete with their regional counterparts or export at competitive prices with such production costs on energy alone. This partly explains why prices for merchandise produced locally continue to skyrocket beyond the reach of most consumers.
The manufacturing sector faces serious production challenges which have given room for cheaper imports especially foodstuffs to be imported (Often through smuggling and under invoicing of merchandise) from neighboring South Africa. Officially South Africa exports goods worth US$2 billion per year to Zimbabwe before smuggled merchandise is factored in. The increase in cost of production in the economy has seen local producers outsourcing production to South African companies that can produce and export to Zimbabwe at competitive prices than local producers. This is largely the case for multinational corporations (MNCs) or affiliated companies that have been operating in Zimbabwe for years with plants in the region. Selected manufacturers have resorted to importing finished products or acting as distribution agents for products they used to manufacture locally.
The local industry is also hamstrung by foreign currency denominated legacy debts which are threatening viability as foreign lenders are withholding supplies or proposing converting debt to equity at a time when local counters are seriously undervalued. The Reserve Bank of Zimbabwe (RBZ) committed to assume foreign legacy debts of over US$1.2 billion at a rate of 1:1 to the US Dollar in February 2019. Manufacturers’ debts constitute the biggest chunk of the debts that date as far back as 2015. Local producers are also feeling the heat of foreign currency shortages on the local market with Interbank rates for 1US$ equaling Z$15.35 and over 19 on the parallel market. The consistent depreciation of the local currency also impacts on the pricing of future bulk orders for the producers as indexing in foreign currency is now illegal.
The new de-industrialization wave has serious ramifications on the local economy in terms of retrenchments, decline in tax revenues, infrastructure decay and growth in the country’s import bill. A sustained high import bill contributes to runaway inflation on the local market and the failure by government to implement policies that provide incentives for import substitution will haunt the economy for years to come. The starting point for the government is to allow the Zimbabwe Electricity Supply Authority (ZESA) to charge a cost reflective tariff that guarantees 24/7 production at optimal levels for the industry. This will reduce production costs associated to powering industrial plants on diesel generators. In terms of foreign currency shortages, more needs to be done in terms of oiling the interbank market through channeling exporters’ retained export earnings on the interbank market. There is now an urgent need of prioritizing value adding raw materials on foreign currency allocations so as to manage supply side costs.
Zimbabwe’s manufacturing sector used to contribute 42% of the country’s export earnings in 1998 and 25% to the country’s Gross Domestic Product (GDP). The sector now contributes less than 12% to GDP and this figure is set to decline below 10% in 2019 and 2020 if the economic meltdown continues at the current pace. The 2007-2008 de-industrialization claimed the scalps of the country’s biggest industries, with some closing shop for good. The second phase is threatening more in a familiar spectacle for the local producers. The 2009-2017 period had seen relative stability and retooling in a predominantly stable economy. However, the gains were short lived as policy inconsistency has taken Zimbabwe back to contraction. The government has to urgently implement policies that stabilize the local economy while supporting the country’s coveted industries.
Victor Bhoroma is economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on email@example.com or alternatively follow him on Twitter @VictorBhoroma1.