‘Let us address foreign currency shortages first’ 

‘Let us address foreign currency shortages first’ 

Source: ‘Let us address foreign currency shortages first’ – The Zimbabwe Independent January 12, 2018

With the wave of price increases characterising the last quarter of 2017 persisting into 2018, Zimbabwe Independent’s business reporter Tinashe Kairiza (TK) spoke to the Confederation of Zimbabwe Industries (CZI) president Sifelani Jabangwe (SJ) on the underlying issues triggering the sharp rise in prices of basic commodities. Find below excerpts of the interview:

TK: We wound up last year with prices of basic commodities going up sharply, and thereafter there were engagements between government, retailers, consumers and manufacturers. What was the outcome of those engagements?

SJ: First and foremost we need to dwell on the issue of the cause of price increases. If you recall, price increases started in the last quarter of 2017. The cause was the unavailability of foreign currency. The Confederation of Zimbabwe Industries (CZI) Manufacturing Survey shows that only 50% of companies were getting Reserve Bank of Zimbabwe foreign currency allocations directly. So the shortages drove premiums up, as companies sought foreign currency on the black market. But there is also a key issue to differentiate on prices going up. Most basic commodities’ prices were stable except perhaps on protein products and there were challenges too on edible oils retail prices. But manufacturing prices for edible oils remained stable. If it increased, it went up between 15% and 20% from last year’s prices. The explanation is that because the commodity was in short supply, the prices remained very high because manufacturers were getting only 30% of foreign currency allocations so they could not flood the market with the product.

Now with regards to protein, there was avian flu which affected chicken and eggs availability at low prices. The meat industry was affected by forex shortages, so prices went up. With chicken, 80% of the prices are in stockfeeds. Prices for veterinary medicines which are imported went up by 100% and that affected the cost structure of the products. The action that is still going on with the Prices Commission is to get a balance between retailers, consumers and manufacturers. All imported products, their prices went up by almost 100%. Imported products like pharmaceuticals — medicines — prices went up by 100%. But prices for locally-manufactured goods went up by only 30%. So these have been the key drivers of price increases. The high Real-Time Gross Settlement (transactions) which are not balanced with United States dollar balances have caused the black market premiums. The black market only occurs when there is a shortage.

TK: Apart from the systematic rise of prices, what are the other consequences of foreign currency shortages to industry?

SJ: One of the things we have to take into account is that our industry is rapidly developing. But industry needs raw materials. You can only grow to the level of your capacity. So it limits the amount of growth industry can register. Which is why we are talking about exports; companies should now focus on generating their own foreign currency because if you just wait to get forex generated elsewhere it is not good enough. As the economy is growing, it also points to us where we should put focus. In this case we have to grow exports. We need, for instance, to reduce our import bill on soya and stop using US$240 million to import cooking oil. We need to grow cotton so that we can increase exports and generate exports and, therefore, more foreign currency. So these are now the things we are pushing for.

There are a lot of companies which are now showing signs of recovery. Blue Ribbon is now looking for capital to expand operations. But we also believe that the currency we are generating is enough because as of September 2017, the country had generated US$4 billion, which we believe by year-end should be US$5 billion. The trade deficit should be at its lowest this year than it has ever been. But we have a problem of allocations. We do not know how to prioritise this money. We must grow and manage our allocations so that they go to the more deserving areas. Our proposal is that we need to have an open allocation system, so that those with currency can trade with those who want currency. Right now these transactions are happening in the black market. That is why the premiums are higher.

TK: Apart from foreign currency shortages, what are the other factors pushing up prices?

SJ: The other issue is to stop foreign currency leakages that are reducing the amount of US dollars we have. One issue I will speak of is that there are smuggled goods on the domestic market and these goods are selling for cheaper prices because they have not paid duty and are being sold for cash. So if banks have US$200 million and they give out US$100 notes to one million people, they will go to the black market and buy these goods because they are cheap. The recipient of the money will take the money out and the money is gone. We have to stop the smuggling. That is what is creating the problem.

TK: Let us talk about introduction of Statutory Instrument(SI) 64, which government introduced to protect local industry and stimulate production. Do you think local industries need such protectionist policies?

SJ: I think it is a chicken-and-egg situation when you are saying industries are retrenching. Why are industries retrenching?

It is because they are competing with cheap smuggled goods. The debate is: is it better to have imported products on the market and unemployed people, or is it better to start developing your own industries and you start employing? This is the argument about SI 64, which is now SI 122. For the first time we saw capacity utilisation grow from about 34% to about 47% between 2015 and 2016. With SI 64, there is also increased tax collection by government, which is why the problem of paying its workers has improved. We saw new investment coming in. There is Delight in Mutare that is now manufacturing packaging material, in addition to Hunyani. PPC brought a new factory here. There is a new company manufacturing cement in Midlands called Diamond Cement. SI 64 has triggered this. In the period 2015-2016, yes there was a drop in capacity utilisation from 45% to 42%, but analysing further, we saw that 47% of the respondents invested towards increasing their capacity, hence utilisation dropped. This is a question of output versus available capacity. This is supported by the actual volume of goods produced. SI 64 has helped in terms of resuscitating industries and also as a solution to the problem of unemployment, and low Foreign Direct Investment (FDI), low government taxes. SI 64 has been okay. There is an opportunity to develop the programme further to work on other sectors.

TK: I have had engagements with tourism players, and the Hospitality Association of Zimbabwe (HAZ) more recently compiled a concept note following the trend of prices before and after SI 64, their conclusion is that prices shot up. Is there merit in these findings?

SJ: The report was compiled on the back end of last year. Yes, prices went up, but it is not connected to SI 64, but to other issues. When you look at some of the products produced by local companies, the prices had actually come down to the point that companies started having a problem of currency. If you look at the timing, it is not connected. What caused price increases is foreign currency shortage, as I said earlier. Yes, if they were using their currency to buy raw materials, prices probably went up, but if they were buying locally, prices remained stable. There are three issues we were pushing for.

The first one is to limit the currency by reducing the amount of liquidity in the market and through quantitative easing.

There is also need to allow people to trade the foreign currency they have, grow exports and manage liquidity.

TK: Let’s look at job losses. In the Manufacturing Survey of 2017 you indicated that you lost about 15% of jobs in 2017 across all sectors, do you still see this problem persisting in 2018?

SJ: One of the challenges leading to job losses has been high labour cost. Companies are now investing in new technology and when you start automating, you really lower your labour costs. One of our members produced agricultural harvesting equipment, one of their biggest costs was labour. If we continue on that trend we will improve.

TK: Are you suggesting that these job losses were a result of companies embracing and investing in technology?

SJ: Tea at Tanganda was being picked manually; Tanganda invested in technology to pick the tea. You can imagine how many people they retrenched.

TK: But amid that automation, capacity utilisation from the manufacturing 2017 survey report plunged from about 45,7% this year. How is that so?

SJ: Capacity utilisation came down, but there was investment in capacity. Here we are looking at output versus capacity.

Companies are not investing for today’s capacity but the investment is for the next five years. We are saying the result is actually not bad because the volume of goods actually went up by 5,5% between 2016 and 2017. The volume is what we are chasing.

TK: I have a few figures here, 15% of job losses and 30% of firms on the brink of collapse and capacity utilisation shrinking to about 45,7%, according to the Manufacturing Survey of 2017. Would you say the local manufacturing sector is in sound health?

SJ: Half of the companies surveyed actually invested money in capacity. If volumes went up by 5,5% that is a state of health because the industries are not collapsing. About 30% of those industries are not on the verge of collapsing, they are facing challenges of securing foreign currency. But at the moment, whatever they are manufacturing, they are selling in spite of the challenges. There was no complete shortage of basic commodities. Beer was still the same price, milk same price. So the sector is not in dire straits.

TK: Over the past decade, industries have struggled to attract fresh investment capital for retooling, expanding operations and procuring raw materials, are there any signs that the situation will improve?

SJ: What is required for us is to sort out our debt situation and it is pleasing there is commitment by the Finance minister (Patrick Chinamasa) to pursue the Lima process. But you have to give credit to the manufacturing sector even if those lines of credit are not available; companies are investing in their capacity. So it shows the resilience of the sector.

TK: Let us talk about the cost of key utilities such as power and water, what has been the impact of such on the operations of industry?

SJ: With regards to power, this is something we have been stating for a long time. We are targeting a power tariff proposal.

In Zambia, with their industries coming up, they are getting power for 0,5 cents per kilowatt hour, and it is also the same in Ethiopia. The cost of power is an enabler. We need to target the same power tariff bracket. China offers power at 0,5 cents per KW/h because of their massive hydro project. If we have power at the right cost, that would drive up our competitiveness. At the moment we are currently being charged 0,9 cents per KW/h. We want to push for a lower power tariff. The cost of water is also much higher in comparison with fellow industries in the region.

TK: Over the last two years, government has embarked on an initiative to set up Special Export Zones (SEZ). Is this an initiative the private sector is supporting?

SJ: We produced the first draft paper, which is the document around formation of SEZs.You will also realise that SEZ boards constitute of private sector players. CZI is also putting recommendations on how the SEZ formation process should be implemented.

TK: The Finance minister projects the economy to grow 4,5% this year, do you think this target is achievable?

SJ: We believe that the 4,5% (growth target) is achievable and we can actually do more. We should come up with interventions on how we can achieve the growth margins. That is why we are coming up with the CZI Manufacturing Agenda. It will look at what can be done to accelerate growth in certain sectors. The new dispensation and administration has brought in new energy, we believe there is potential to do more. If all sectors participate, we believe the growth projection is attainable. We all know the potential of the agriculture sector.

Fact File: Sifelani Jabangwe

  • Confederation of Zimbabwe Industries (CZI) president;
  • Engineer by profession;
  • Has an Acca diploma in Financial Management;
  • Holds a Master’s in Business Administration degree;
  • Executive member of the Zimbabwe Clothing Manufacturers’ Association;
  • Past president of the CZI Mashonaland Chamber;
  • Former member of the Construction Industry Federation management committee; and
  • Married with three children