Forget Covid-19: Lack of demand is the real enemy

15 May, 2020 - 00:05 0 Views
Forget Covid-19: Lack of demand is the real enemy Understanding the interplay of economic factors that help increase demand can allow businesses like Truworths to plan for potential growth and future opportunities

eBusiness Weekly

Kudzai Sharara Taking Stock
When I asked Truworths chief executive officer, Themba Ndebele, what his company was doing to preserve value in the wake of the Covid-19 pandemic, he nearly laughed at me.

It is only after I saw Truworths’ results for the half year ended January 5, 2020, that I began to understand what he meant.

Local companies across the board were already battling falling demand long before the outbreak of coronavirus and the subsequent lockdowns.

Although the Covid-19 pandemic is showing signs that it can be devastating to economies, local players were already heading towards rock bottom.

In other words, Ndebele’s major worry was on the already long established falling national demand.

“Once your demand is not there and people are not going to work, there is nothing you can do about it,” he remarked.

Before Covid-19, aggregate demand in the country had already been knocked down by a slew of bad news: a consecutive drought, energy and currency shortages.

The falling exchange rate, hyperinflation and loss of jobs decimated consumer spending power and is threatening the viability of businesses.

For the half year to January 5, 2020, Truworths’ sales dropped by an average 63 percent and this was before the Covid-19 pandemic and lockdown.

Fellow listed entity Delta, recorded similar experience for the full year to March 2020, with both lager and sorghum beer volumes falling by 42 percent and 25 percent respectively.

At Dairibord, the story was the same as sales volumes were down by 17 percent for the full year to December 2019.

Most of this downward trend can be attributed to the fall in aggregate demand mainly as a result of a falling exchange rate and hyperinflation.

The local currency is now worth just 2 percent of its former value, in US dollar terms, in less than 2 years. This is against a background where prices are tracking the exchange rate while salaries are almost stagnant.

The situation has now been made worse by the Covid-19 pandemic, which has seen most people losing their incomes and at worst their jobs.

While before coronavirus there was talk of falling spending power, there is now talk of complete loss of incomes.

If the total consumption of goods and services in the economy decreases, businesses have to let go of workers in response to the declining revenue.

Some industries have shed jobs since the outbreak of the pandemic and will continue to do so for longer judging by what is happening globally.

The hotel sector as well as the tourism industry might only recover in a year or two, and jobs that have been shed might not be required till then.

The fast food and restaurant sector might not require as many waiters as did prior to this and again jobs will be lost.

It’s even worse in the informal sector, which despite other sectors of the economy having been opened is yet to get the green light.

Most in the sector have been operating from illegal spaces and might not be allowed to return after stalls and illegal structures, mostly in Harare, were demolished during lockdown.

Is this demand shortfall is not dealt with, jobs and wages will decrease further.

How to boost demand?

Understanding the interplay of economic factors that help increase demand can allow businesses like Truworths to plan for potential growth and future opportunities.

Lowering interest rates

In other world economies, central banks would lower interest rates to help stimulate demand. As interest rates decrease, consumers have more disposable income because of lower interest rates on loans. While the Reserve Bank of Zimbabwe has lowered its lending rates, the impact will, however, be minimal as interest rates have been lower for much longer given the level of inflation. It’s a tool that has already failed judging by the level of the loan to deposit ratio in the banking sector of 36,6 percent at the end of 2019.

Decrease in taxes

The other available option would be to lower taxes. Reducing taxes increases the amount of available cash that consumers can use to purchase goods and services.

The more cash consumers have, the more purchases they are likely make. As consumers in a country increase spending, it directly increases aggregate demand. Tax cuts could decrease individual income taxes, sales taxes or property taxes.

Surprisingly nothing much has been considered on this front. Instead we have seen more taxes being introduced. The 2 percent transaction tax and the continuous review of fuel levy are good examples of increased tax burdens. With our Government believing in increasing taxes instead of broadening the tax base, it is unlikely that it would use tax cuts to stimulate the economy.

Government expenditures

The most viable option is thus to increase government spending on goods and services.   The infusion of capital into the economy through Government spending leads to increased financial resources in the private sector that injects financial resources into the hands of consumers. When consumers have more disposable cash, aggregate demand increases.

Infrastructure investment could be an extraordinarily useful tool for macroeconomic stabilisation. Infrastructure investment includes capital investments in transportation, utilities, and environmental projects.

Most estimates of the output multiplier for infrastructure investment are substantially higher than for other fiscal interventions.

While theory points to the fact that sustained increase in infrastructure investment is our best short to close the aggregate demand shortfall, there are fears that government does not have the financial resources to embark on such projects.

Money supply and domestic borrowings are already at the higher end and increasing these could fuel inflation.

However, in any proposal to boost the nation’s infrastructure investment, there will be many details to work out, but such details seem worth wrestling with given the large potential benefits at stake.

The starting point would be to look at infrastructure projects that require little to no foreign currency and invest in those.

The private sector wishing to embark on large infrastructure projects can also be incentivised.

 

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