Civil service pay rise challenges industry
The doubling of civil service salaries should have a positive effect on the economy with the extra spending power of easily the largest group of employed people pumping a decent slice of cash into the retail sector, and thus also into the manufacturers who now make most of what people buy.
There might be some worries that the move could be inflationary, but this is extremely doubtful.
First, on the money supply side, we can now bet on the record of the Second Republic that the extra pay is covered by extra taxes. As usual the civil service has been lagging in recent pay rises behind the better employers of the private sector.
That lag means that already the inflow of PAYE from those private employees, and the extra VAT from what they buy, has already been moving into Government accounts.
March must have seen the first quarter company tax payments, and those were obviously higher if what we read in the public accounts of listed companies and what they were predicting for this year.
In any case the tight-fisted Ministry of Finance and Economic Development has shown its extreme reluctance to spend what it does not have, has never in the Second Republic ever borrowed a cent for recurrent expenditure, and you do not get more recurrent than salaries, and even on capital expenditure borrowing is basically limited to things connected with a resulting revenue stream, like the tolls that are paying for the Mbudzi flyover over a couple of years.
And we should remember that the International Monetary Fund and World Bank are allowed to see our accounts, along with the regular public updates that the Ministry is obliged to make, so no one is going to cheat. If there had been a cashflow deficiency but a desire to reassure civil servants that their employer cared, then we would probably have seen an announcement that the 100 percent would be divided into two tranches, one now and one in a few months.
In any case, in net terms, the Government will claw back some of the increase as almost all civil servants start paying income tax on part of their increase at a higher rate. There will also be some extra VAT from what they buy, and the companies that sell to them will be making better profits and so paying more tax.
Even more duty from beer and cigarettes will be drifting into the Government coffers.
The other potential inflationary pressure will come from the increase in demand for a range of products, but again there is capacity in the manufacturing sector to meet that demand and retailers will automatically order more if they sell more.
The potential shortages that have caused problems in the past are now rare, and we can expect that the normal manufacturing and other procurement will work.
But mainly the business world will now be looking at the increase in demand, and hopefully tailoring products to meet that demand.
The very bottom of the spending ladder, the mealie-meal, cooking oil and vegetable markets, will see little change since this is what people spend their last dollar on.
For the basic supermarket markets, the additional demand will come in those middle-range products, again mostly made or grown in Zimbabwe, or at least packed in Zimbabwe, along with some basic imports and the odd luxury.
Because we are still rebuilding our textile and clothing industry there will be a modest and manageable surge in demand for imported clothing and textiles, but again for products and brands that have already established themselves.
The construction and hardware suppliers could well see more demand, since a respectable percentage of civil servants are building homes, or extending homes, but again a lot of that money gets spent on stuff that is now made in Zimbabwe, with the capacity available to increase supplies if needed, especially as the rainy season is almost over.
Manufacturers and retailers need to be ready to estimate where new demand will arise and make appropriate plans, while remembering that any attempt to raise prices faster than general, and now low, inflation is going to be highly counter-productive.
There is generally sufficient competition in the Zimbabwean domestic market now to ensure that at least some will prefer modest profits while pushing volumes to counter those who like small supplies at higher prices.
Consumers are also aware of the danger of cartels in the manufacturing sector, where they can and have arisen, and the retail sector needs to keep its eye on that as well, building on its need to keep its customers happy since retailers tend to be blamed for price rises that are actually the fault of their suppliers, the manufacturers and importers.
Retailers also now have more muscle to check any greed in local manufacturing since a growing percentage of their sales are in foreign currency, and they are allowed to retain 85 percent of this, so can fund more imports if local suppliers are overpriced.
We still see some products where the imported version is cheaper than the local supplier, and that means either the local supplier has some over-priced raw materials, and needs to sort out their supply train, or the local supplier is grossly inefficient, or the local supplier is just plain greedy.
A few minutes in front of the some sets of shelves will highlight those problems, and especially if you want one example,e the shelves devoted to spices and condiments, where some surprising price differences can emerge, even with the customs duty payable by importers.
Zimbabwean manufacturers need to understand that there can never again be the sort of import controls they were far too used to for more than 50 years, with a small gap in the later years of dollarisation, and need to understand that as AfCFTA moves forward, and the political pressure is there is move it forward, they need to be able to compete in other African markets, and realise that other African suppliers will be paying ever less duty so that element of protection disappears.
Some Zimbabwean manufacturers are efficient, some are becoming efficient and some still live in the fairyland of controlled imports of the post-UDI colonial era and the earlier decades of independence.
Some manufacturers have legitimately complained about low volume demand increasing costs, with overheads forming a higher percentage of total costs than their foreign competitors face.
The growing wealth of Zimbabwe, reflected first in the private sector but now in civil service pay, can boost demand and help sort that out, but the operative word in the modern world is “can” not “will”.
To move from potential to reality needs some hard work, some careful operational proficiency to produce the right product and the right price, and some good marketing, possibly in combination with the more innovative retailers.
In any case for certain products, an ability to make reasonable profits on a wide range of low-volume items can be an advantage and can be very useful as export market potential grows with AfCFTA, with quick changes and special production runs to meet new tastes.
A lot of that nimble footwork does require an educated and skilled workforce, one that can switch a production cycle almost every day if necessary, but that is what Zimbabwe is supposed to be good at, and what Zimbabwe really needs to develop as far as it can go.
The catching up of recent inflation in the salaries and spending power of private sector and civil service employees, the growth in income of the small businesses, and the general movement of a growing economy seeing a general rise in average real income will all help.
The business world can take advantage of this, plus the large dollop of extra farmer money as the income from the new harvests moves into farmer bank accounts, to become far more responsive to what people really want to spend money on, and making sure they can make and sell the right products at the right prices.
That in turn will mean they have the products they need as trade opens up under AfCFTA, where a solid local base means you have the muscle and the products that can interest those further away.-ebusinessweekly
