eBusiness Weekly
Misheck Ugaro
What is the appropriate strategic position for industry under the current economic slowdown conditions? There are different schools of thought regarding the appropriate response.
One line of thought is that business focuses on staying “alive”, while another line of thinking is that the Zimbabwean landscape actually presents great opportunities to be exploited.
The first view is rather pessimistic and presupposes that macroeconomic stability should be achieved first to enable industry to start any growth strategies, and that the current objective would be to consolidate current positions.
The challenge with this position is that it risks trapping the economy into a vicious chicken and egg cycle of what starts, because it is forward planning that is required in order to achieve that stability. It is industry that must take part in building that stability. There is a risk of withdrawing into a “freeze” comfort zone.
We are persuaded to concur with the second line of thinking as a more appropriate response and that industry should adopt plans towards enhanced production going into the medium to long term. There is an opportunity of reorganisation amid the current economic down turn in order to position into an efficient and higher productive gear when stability is finally realised. Industry can adopt a forward looking strategic decision right away.
The approach expected from industry captains is that of going concern that requires the adoption of long term positioning of their operations for the eventual emergence of a strong economy.
Staying put in survival mode risks trapping the economy in outdated and uncompetitive ways of doing business and increases the risk of being wiped off by competition when things open up later. At that point it might be too late to begin. Our current economic reality should be the source basis of innovative thinking. Necessity is the mother of invention.
Strategic planning should be based on the current realities on the ground with a view of solid future growth. The reality of the economy on the down side is Foreign Direct Investment (FDI) flows are minimal and likely to remain so for the medium term; there is a drought for a second consecutive year; the local currency has consistently devalued on the basis of increasing money supply and that inflation has generally been on an upward trajectory although tapering off; aggregate demand has been declining epitomised by a contracting GDP but with projections of a turnaround; there is 30 percent power supply and that capacity utilisation is down at 30 to 40 percent.
On the positive side are the realities that the country’s exports performance has reached record highs with monthly average above US$700 million despite the unstable macroeconomic environment and that compares favourably with the SADC region; that through the Transitional Stabilisation Programme (TSP) the issues of budget and current account deficits have been largely controlled, even though some risks still persist; that the energy sector has been deregularised and opened up for competition and anyone can enter and participate (can invest in self-supply or exploit potential symbiotic synergies and establish joint venture partnerships:
In fact the power utility has failed and its role as a strategic institution is debatable given it can only meet 30 percent of requirements even with import supplements — a topic for another discussion); that the Government has instituted a raft of incentives for certain investments including the generation of alternative sources of power just to mention but a few.
Our view is that industry needs to step up under these real conditions and take the initiative instead of waiting. Examples abound where countries developed themselves from scratch. Japan is not renowned for any mineral wealth compared to Zimbabwe, nor does any of the Asian tigers and in particular Hong Kong. Zimbabwe has these in abundance, enough arable land, attractive tourist destinations and a highly skilled labour force. Industry can target growth from the various value chains of these strong sectors. While local demand is somewhat subdued, there is a significant stream of diaspora income supporting it. A weak local currency also makes our exports competitive and therefore production should not only be for local demand but for the export market too.
Our current economic situation must drive a robust response from industry. It is a well known fact that the development of the mobile phone owes its origins in the Nordic countries due to the climatic conditions that made the traditional telephones unworkable hence created the need for wireless mode of communication. Industry in Zimbabwe must adopt a more forward looking approach born out of the current adverse conditions.
In that regard, it’s notable that other sectors of the economy have adopted a growth approach with mining aiming to be a US$12 billion industry, tourism and agriculture are expected to buttress the country’s economic revival. It is in this spirit that the manufacturing sector should not be left behind and needs to adopt innovative and strategic growth plans, starting now in 2020.
There is life after death and so the focus in the short term, starting from 2020, is expected to be on investment plans on retooling, plant replacement & repairs, operations reorganisation, rehabilitative works on company turn around and export markets development notwithstanding the dearth of FDI inflows given the perceived country risk.
Industry can seek the co-operation of the authorities to create the necessary environment with the required conditions that generate confidence and attract investment. Consistent policy direction from the authorities is critical and the promotion of a free market is essential.
A case in point is, the nation is eagerly awaiting the forthcoming Monetary Policy Statement which should further deepen the market operations with minimal interference. The critically desired objective and outcome is economic stability.
As industry prepares their next 5-year strategic plans into 2025 and beyond, the expected and desired monetary policy effect will be on:
Stable money supply growth: In 2019 money supply growth worryingly topped 80 percent ($23 billion by September). Despite this, however, inflation stabilised in the last quarter of the year (MoM tipping d own from 18,07 percent in August to 17,72 percent in September). However, the filter through effect of money supply growth is expected in the first quarter of 2020. (In fact some experts have forecasted broad money to hit above $30 billion by December) and therefore the forthcoming statement is expected to deal with how this risk will be mitigated. It is expected that the authorities will cap money supply growth (in the face of expansionary pressures) in order to maintain that stability and allow industry to plan their investments for future growth with reasonable levels of certainty. The anticipated issuance of an additional $500 million in notes and coins in circulation should ordinarily not affect broad money supply as this is in substitution of already existing electronic balances. It should in fact reduce the cash premiums that market players are arbitraging on as a result of the gap between optimal notes and coins in circulation of about $2 billion and the actual amount in circulation of about $1,5 billion.
Exchange rate: Business expects further policy strengthening in support of a stable foreign exchange market and the resultant exchange rate. This has also been stable over the last 4 months of the year (at around $15,8:US$1 on the interbank) especially as the impact of the newly instituted Monetary Policy Committee (MPC) began to filter through. A stable exchange rate will enable industry to pitch their investment plans with reasonable certainty. This also has a positive impact on inflation expectations given that Zimbabwe inflation is influenced by exchange rates.
More importantly, the authorities need to show their intention for credit growth to the private sector. The MPC has held the bank rate at 30 percent over their last two meetings and hopefully the authorities will further enhance this as a way to crowd in the private sector.
We need to see policy that reinforces the banking sector’s traditional role of intermediation as opposed to the current scenario where above 85 percent of reported banking income is from other lines instead of from lending activities.
The investment plans anticipated for industry must be funded from local resources. This will obviously create pressure on demand for foreign exchange to cover the imports of equipment but as long as this is for productive purposes it is justifiable and proper market forces should determine the correct exchange rate. It also takes out the currency risk from the financing of industrial turnaround plans from foreign lines of credit, which are anyway absent. The authorities must show the support for industry to refinance work as it gears up for increased productivity but more importantly, industry must step up and be counted.
Misheck is an economist, a former expatriate banker based in several SADC countries and currently works as a corporate advisory services consultant. He is a member and past vice president of the Zimbabwe Economics Society. [email protected]/(263)0777 052 004/0712 808 140.
