International experts have said Zimbabwe needs to wake up to reality and come to the realisation that some of the industries suffering under economic challenges are not going to come back.
World Bank outgoing country economist Mrs Nadia Piffaretti said that the country has been experiencing accelerated de-industrialisation as now new firms are coming in while at the same time the old ones have gone past their lifetime.
She noted that de-industrialisation started 20 years ago and has accelerated in the past 10 years. “A World Bank report in 1986 raised concern on the archaic equipment being used by local industries at that time.”
Most of the industry in the country was built in the 1960s, during the UDI era as a sanctions busting measure. In most of the instances, industry was set up using second hand machines. After independence most companies failed to recapitalise only focusing on retooling and maintenance.
Mrs Piffaretti said de-industrialisation can only be corrected if a predictable economic environment is created considering that there is need for huge capital investment in the industry. “Firstly you need markets and technology. And this can be done through partnerships with foreign investors.”
In a study, commissioned by the Competitions and Tariffs Commission of Zimbabwe titled “Enhancing Zimbabwe’s Regime for Resolving Corporate Financial Distress”, Mr Daniel Fitzpatrick, a commercial law reform consultant seconded by USAID said companies in economic distress were unlikely to come back as they cannot succeed in the market place since competition produces a better product at lower cost.
He said economic distress exists regardless of a firm’s capital structure. “In this regard the company would still be unattractive even if it had no debts whatsoever.” This is because economic circumstances are now vastly different from the time when the company prospered.
As a result, its assets will fail to bring in sufficient revenue, relative to the costs of operating the firm and the alternative ways in which they could be used. “Eliminating creditors would not change the fundamental problem the firm faces.”
Mrs Piffaretti said Sable Chemicals was one such company which needed huge transformation in order to come back and compete with their products.
“The Sable Chemicals plant was installed in an era where there was excess electricity supply. It used to take up 20 percent of the nation’s power. But now where there is limited supply, it still requires the same amount of power.
Sable Chemicals is struggling to raise $750 million required for the establishment of a coal gasification plant at its Kwekwe factory to replace the current electrolysis system, which is expensive to run.
However, companies in financial distress are likely to survive and are less difficult to fix than those suffering from economic distress. “The challenge involves distinguishing between the two conditions especially when shareholders tend to see their problems as financial rather than economic,” said Mr Fitzpatrick.
Mr Fitzpatrick said generally Zimbabwe was a challenging place at the moment as the problems it was facing were truly substantial.
“Zimbabwe has a rigid currency regime which means there is no opportunity to devalue. Solutions in this case have to be approached from alternative methods.”
Mr Fitzpatrick also said that the banking sector is under threat if it continued ever greening (rolling over) loans as it piles more stress on banks’ balance sheets. “If that is not addressed then the banking system might be swamped.”
Officially in the sector 17 percent of loans are non-performing but this figure could be higher if the banks included restructured or “impaired” loans, for which banks don’t have to set aside heavy provisions in case of default.
Mrs Pifaretti said the only way out of the challenges facing industry was for Zimbabwe to lower its country risk. “The rates of returns are normal but country risk makes profits negative.”
She said Government needs to have a good policy environment which was predictable and consistent.
“An investor planning ahead cannot predict the country’s policies even for the next six months. Policy predictability would lower country risk.”
Mrs Pifaretti also said there was a lack of confidence on the respect of property rights even for domestic investors.
“New farmers cannot make any meaningful investments on the land. Land was given but not really given as they do not have title deeds.”
Finance Minister Patrick Chinamasa recently said Government is afraid of providing title deeds to farmers resettled under the fast-track land reform programme.
“We don’t trust those on it, we fear if title is provided the farmers are likely to sell the land to the former owners. We may end up with an accumulation of the asset in a few hands as was the case before the land reform,” said Minister Chinamasa.