High production costs strangle economy

via High production costs strangle economy – NewsDay Zimbabwe August 18, 2015 by Tatira Zwinoira

Analysts say Zimbabwe has to reduce the cost of production to increase the export competitiveness if it were to arrest the rising current account deficit which stands at 22% of the gross domestic product (GDP) in the six years to 2015.

The trade deficit has been widening with imports growing faster than exports in the first half of the year.

Although exports grew by 0,4% to $1,23 billion in the first half of the year from 2014 figures, total imports increased by 2,3% to $3,1 billion. Imports are expected to grow by 6% by year end.

Economist John Robertson said Zimbabwe was expensive in terms of production compared to other regional countries. He said this resulted in factories turning into warehouses as people opt to buy from foreign markets.

“Until we reduce our costs we will remain uncompetitive. We are failing to attract investment needed to lower costs. Part of the problem has to deal with labour. We have to get rid of retrenchment packages to reduce the costs,” Robertson told NewsDay yesterday.

In his mid-term Fiscal Policy, Finance minister Patrick Chinamasa said Zimbabwe’s current account deficit was higher than the Sadc macro-economic convergence criteria thresholds of 9%.

Foodstuffs accounted for 64% of the imports which Confederation of Zimbabwe Retailers president Denford Mutashu said was due to a regression in capacity utilisation within the manufacturing sector.

“We have become a retail nation and not much focus is being put on production. Government must direct investment into production and not retail and must sit down with stakeholders in the industry,” Mutashu said.

Mutashu said that there was a huge willingness to buy locally, but that goods were too expensive and not sufficient enough forcing retailers to import.

The two biggest contributors of imports in the first half of the year were South Africa at 40% and Singapore at 20%.

Robertson said the reason why Singapore was a big contributor was due to the fact that they act as agents for people in Zimbabwe who want to purchase goods and products such as vehicles from the Asian markets.

He added that the only way to reduce the deficit was to put in place policies that attract investment, but government had chosen policies that discourage investors, such as indigenisation laws.

“Those arguments [indigenisation] are emotional and not economic. If you want investment, it has to be profitable to investors.
If it is not profitable, the investors will not come,” Robertson said.

He said government had to encourage better investment because even with the indigenisation laws the investors are demanding their 49% upfront of which companies cannot afford due to the liquidity crunch and as such chases them off entirely.

The current account deficit has caused government to revise down the National Budget to $3,6 billion from the original budget projection of $3,99 billion.

Government is, however, working on measures to boost exports such as the provision of export financing.

The Reserve Bank has also advised government to put in place fiscal and internal devaluation mechanisms such as a tax on imports for goods that could be obtained locally and reducing the cost of doing business as a way of increasing exports and curbing imports.