Inflation end needs calculating managers

16 Oct, 2020 - 00:10 0 Views
Inflation end needs calculating managers

eBusiness Weekly

The crash of monthly inflation to well below 4 percent in September was the direct result of the stabilisation of the exchange rate on the auction market, coupled with the allotments of full bid requirements by the Reserve Bank, meaning that local manufacturers could source all needs from the auction.

The more interesting question is therefore why there was any inflation at all, and when perhaps we can see prices falling, rather than if we can see them fall.

So what are the remaining inflationary pressures?

On the demand pull side there does not appear to be much. Spending power was devastated by the bout of hyperinflation between the introduction of the interbank market last year, intensified during the attempts to manage the float, and went out of control once that rate was frozen.

All employers have been raising wages, and the responsible more than others, but the general effect is that in real terms average household spending power is in real terms significantly less.

Even those who try and either be paid in US dollars, or equate their Zimbabwean fees to US dollars, and frequently use the black market final sell rate to guide their conversions, have seen a fall in income simply because people have been cutting back on spending.

This includes the medical profession, who might not have been hit as hard as lawyers since you can postpone your divorce but cannot postpone an operation.

But even in something as fundamental as health some are not so eager to rush off to the doctor when they fall ill, waiting to see if nature will work, and others have been turning to the public health system, which is now a possibility since a combination of sympathy and heavy lifting by the Government has largely ended strikes.

So every even modest attempts to raise prices sees a volume cut.

The curious inequality in the Zimbabwean market means that an overwhelming majority are on the breadline or below and simply cannot cope with price rises without cutting back on volumes and substituting lower-price substitutes.

In one sense we still have the old dichotomy between “white jobs” and “black jobs”, although these days of course almost all in employment or self-employment are indigenous. But we inherited a highly-unequal society and it is still highly unequal. The problem arises within such a society largely because those who make the pricing decisions are in the better paid minority.

So, to pluck an example out of the air, raising the price of a loaf of bread by $5 does not seem a serious rise to a bakery manager.

But to someone who cannot find an extra $60 a month to buy a loaf a day it is a really big deal, and bread might move from a necessity or semi-luxury convenience food to an occasional pure luxury.

In other cases you get pure product substitution. No one knows yet how the ending of the roller meal subsidy will affect the production runs of millers.

But, if all products are sold at cost plus fixed percentage mark-up, and millers match output to demand, we are likely to see a shift away from highly refined maize meal to roller meal, a far less convenient food but when you are counting each dollar you take what you can pay for.

Even at the top end of the market you see some of this. Someone who fancied an upper-brand of scotch whiskey might now have moved down-market, and even be wondering about whether the local product would work okay if they switched to cocktails and used mixers.

Covid-19 and the resulting lockdown and other regulations also dampened incomes and so dampened demand.

Presuming most people in business are anxious to maintain volumes if they can do so at a profit we now have to turn to the cost-push factors that might keep inflation positive.

While forex costs are no longer such a factor, and even if the rate does rise on the auctions this will be marginal, there are other costs pushing prices.

First there was some catch up in prices in highly regulated markets. Fuel is an obvious one, although here the cost-push tends to be de facto rather than de jure, and was largely a one off resulting from the switch by oil companies to US dollars. Electricity was a second: a 50 percent jump will have an effect, but not a large as some might be reckoning. Since Zesa managed to abolish load shedding, or at least cut it right down, a few months ago every factory can now run on Zesa power rather than generators. And the proliferation of solar systems, while imposing an initial capital cost, has certainly cut running costs.

For those reliant on local raw materials, we have seen some catch up in the prices farmers get. There was a lag but that again was largely a one-off.

Wages are another factor. These have been rising, and although as already noted they have not risen in real terms to what they were at the beginning of last year, they are still higher than when hyperinflation suddenly turned into ordinary inflation in August.

So what can businesses do to contain costs, as they must do if they are to maintain volumes?

First of all efficiency and productivity must now come to the fore. Managers need to examine their whole operation. Energy savings can ameliorate fuel and electricity price rises, and this has to go far beyond switching off LED bulbs.

The whole operation has to be looked at, and technical experts listened to a lot more carefully over such matters as the trade-off between a power surge when you switch machines on and higher energy costs by leaving them on. Accurate measurements and detailed calculations seem to be required.

Zesa are assisting in this process for the major producers by changes in their power tariff systems that seriously hammer those with low load factors and power peaks at coinciding with the peaks of others. A modest switch in shifts might produce savings, but some engineer has to measure and calculate.

Wage inflation is serious and long-lasting. But here again looking at modern workforces might require a change in structure. Many businesses have become manager heavy.

Part of that was a 1980s phenomenon when there were serious shortages of practical expertise, but four decades of universal secondary education has eliminated that. Giving skilled workers more responsibility and cutting back on managers could produce serious savings, as the National Railways of Zimbabwe discovered when it was finally forced to do the calculations. Air Zimbabwe, now under what amounts to a receiver, has been doing the same sums.

The proliferation in managerial ranks also saw rapid rises in transport costs, or at least a rapid rise now that everyone has to live in the real world rather than the world created by distortions.

Dollarisation, for example, saw a major shift away from dishing out Mazda 323s or their equivalent to far fancier imported crew-cab pick-ups, the “double cab executive vehicle”, and those a lot fancier than the basic pick-up with a larger cab that they started out as.

We might need to remember the advice that the Earl Mountbatten, uncle of Queen Elizabeth II, who was financially hit when his rich wife died and was offering practical advice to his daughters.

He noted that the gap between driving a Rolls Royce and a Morris Minor was trivial compared to the gap between a Morris Minor and walking.

But you still see fairly new Mercedes Benz cars parked outside cheap flats when rational behaviour would suggest a Honda Fit parked outside a decent house.

The efforts to make costs more productive is not just academic. The lower the inflation rate the lower the pressure from trade unions and from employment councils, which handle so much of the wage negotiations for non-managerial staff.

In one sense we are now back to where we were in 2009 when dollarisation came in, although with the advantage that the local currency gives a huge advantage to local industrialists instead of smashing their businesses.

But over the first couple of years of dollarisation, as everyone started recognising we were in a stable environment, prices were generally falling despite wages generally rising.

But we were so damaged by hyperinflation that businesses were working on growth and survival, not on creating an ideal system.

It is now once again a scandal, despite the new advantages, that a local product should cost more than its imported substitute, a scandal that suggests some of our business managers lack the required skills to extract high levels of productivity from the people they have hired and the machinery they have beggared themselves to buy.

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