eBusiness Weekly
Zimbabwean formal businesses are not recovering as quickly as they thought when the lockdown was eased to Level 2 almost four weeks ago and all formal sectors were exempted.
A second problem is now becoming more decisive, the fall in purchasing power of many Zimbabweans which is driven by two pressures.
The first is the continued lockdown of the bulk of the informal sector and many small businesses, especially those operating in the city centres where their customers are not able to come, or at least not easily.
The Government has taken some steps, the most immediate being the monthly payments to those who are not able to earn their living. But so far there are just 200 000 people receiving these payments of just $200 a month.
While the monthly stipend is rising to $300 from this month, this is not going to do much except buy mealie meal and vegetables, and even then the buyers need the subsidised bags. Other producers can whistle for their customers and when you consider that the new stipend buys just 10 loaves of bread the problem is obvious.
The plans to cope with up to a million monthly payments will pump more money into the economy, but it will be spread over a very large number and do little to increase the sales of anyone outside the grain millers and the vegetable farmers.
The second problem is the surge in prices. Some of this is the fault of many in the formal sector, those indexing their prices to the blackmarket exchange rate. There are a few in this area who actively speculate in the exchange rates as a simple, although totally non-productive, method of using their large cash reserves. But for those on salaries and those in receipt of Government handouts, the rising prices simply mean that they buy less.
Those who are impressed by large shopping trolleys going through the tills in northern suburbs supermarkets in Harare, and southern suburbs supermarkets in Bulawayo, should take a stroll in the city centres and in the shops and supermarkets where most people live. They will see the warning signs in small baskets of groceries and will see just what groceries are being bought. Most producers are fairly obviously facing lessening demand for their goods.
At the core of the speculative behaviour is that very small group of people swimming in liquidity. Most people are running down savings and hoping that the general match of prices they charge and prices they pay will allow them to continue with their present lifestyles.
This will prove impossible if volumes start declining sharply, as they are now likely to do. So demand from even the upper middle classes will be falling, although these families will have a wider spread of items they believe are essential. So relying on the appalling inequalities in Zimbabwe is not going to be as smart as it once was.
Diaspora remittances are falling and it is likely they will keep falling. The fall in business activity around the world as a result of the measures taken against the Covid-19 pandemic have pushed the global economy into its worst recession since the Great Depression.
Efforts are being taken to re-float sinking economies, but while some recovery is possible, there are still far more people in developed countries, or countries where Zimbabweans who send money home each month actually live, who are out of work.
That means fewer people sending money home, or at the very least smaller monthly payments, on average. This is another cut back in the total purchasing power of Zimbabwean consumers.
We have already seen the effects of inflation in financial statements of public companies.
The first quarter had no lockdown, well, at least one for just two days so Covid-19 had no major effect. But volumes were falling while costs were rising. Even the firms that are largely little effected by inflation, say Cassava, Delta and Econet, were being hit.
Admittedly the revenue flows for the big providers of telecommunications and online services probably were rising during the lockdown, with those who bet in the Zimbabwe Stock Exchange moving money into companies like Cassava, which has now raced past Delta to take the top spot on the market capitalisation list.
But we will not know for a month or two how far these sort of firms have flourished. And those captains of industry now working at home have already discovered the cost of data, and the cost of holding virtual meetings. There is a general impression that there are now fewer meetings and more purely audio discussions, rather than video conferencing.
All this means that the black market exchange rate will have to fall at some stage and playing with this rate is not going, in any case, to solve cashflow problems although some obviously feel a bit of forward buying will help.
The Government has promised an $18 billion package. But this includes the money needed for social security, the money needed for the health authorities to fix hospitals and buy protective equipment, and the large sums being invested into agriculture, which were already budgeted for. The agriculture money will eventually have an effect on both GDP and on the balance of payments, by slashing essential import demand and thus allowing further withdrawal of the State from the currency markets.
But a fair chunk of this money will be borrowed, to be relent. It sounds weird but makes sense when you remember that as private sector cash is moved through the Government it converts from commercial debt to sovereign debt or Government-guaranteed debt. But this process, and the process of amassing tax money, takes time.
So companies hoping for almost instant aid on cashflow might find that difficult.
This means they have to look more commercial, for debt or for equity. Piling up debts, whether to Government or to banks, is going to be a burden. It has to be paid back and interest has to be paid.
Believing that inflation will largely destroy this debt is a gamble. Falling demand will in the end lead to deflation.
So one possibility is floating companies or creating rights issues. These, admittedly at the moment, might be difficult to sell. But if the black market exchange rate suddenly stabilises or starts falling, and the Government guarantees low interest for buyers of debt, then those with cash are going to be looking for something, somewhere.
And here equity should be more attractive. So it looks as though business will have to cope for another month or two, waiting for some funds flowing from the Government rescue package and for the few holders of the bulk of our money supply to start realising that there are so few options that lending to or buying into the private sector are the only real options left.
The future is indeterminate. But we can nudge it our way a bit, and we can remember that some of our problems are self-correcting. Falling demand will slash inflation and the blackmarket rates.
