Escalating US dollar expenses choke manufacturers

Rising US dollar expenses have exerted pressure on manufacturers as the cost of production increases, resulting in price adjustments in both US Dollar and Zimbabwe dollar terms.

The economy has continued on a dollarisation trend, with 80 percent of transactions conducted in foreign currency, as reported by the Zimbabwe Statistical Agency (ZimStat).

Businesses forecast the operating environment to remain volatile and complex due to continued inflationary pressures, currency instability, escalation of costs and reduced consumer disposable incomes.

Economist, Victor Bhoroma, told Business Weekly that the major contributor to costs and price increases is due to budget propositions that were made by the government.

He said most of the taxes introduced had a net effect of increasing the cost of production and these include fuel levies, toll fees and border access fees at the Beitbridge Border Post, which is a key trading passage.

“All that has a net effect of increasing the cost of production for manufacturers. If you look at some small to medium enterprises and informal traders, they also have the effect of affecting demand for manufacturers.

“So all those combined with the usual recurring exchange rate difficulties that companies face, power cuts, where manufacturers have to resort to alternative power, all those are a key factor in increasing the cost of doing business,” he said.

He noted that, for instance, the increase in tax on sugar saw increased prices for cordials and the retail price of sugar itself.

He noted that the exchange rate disparities between formal and informal traders mean USD prices on the formal retail shelves are higher than on the open market.

“Such disparities are caused by the policies that we have in the country; otherwise, without genuine reforms, it will be better to use the USD,” said Bhoroma.

Zimbabwean beverage manufacturer, Schweppes, has since announced a 29 percent price increase on Mazoe drinks with immediate effect, with a 2-litre bottle of Original Mazoe now priced at US$5,10, up from US$3,50.

Schweppes said the sugar tax, charged at US$0,001/g, has a bigger impact on Mazoe prices than on other ready-to-drink beverages.

“This is because it is calculated per gramme instead of per millilitre, as is the case elsewhere. Unlike VAT, the sugar tax is a cost to the business, whose funding carries the cost of money.

‘‘Supply to formal retailers and wholesalers comes with longer payment terms. The effect is to strain working capital, as the tax has to be paid before customers have paid,” the company said.

Finance, Economic Development, and Investment Promotion Minister Mthuli Ncube, initially set the surtax on sugar at US$0,022 per gramme but later reduced it to US$0,001 for specified beverages in response to concerns by businesses.

Another economist, Dr Prosper Chitambara, concurred with Bhoroma that rising production costs and prices are largely a result of an increase in taxes levied in USD.

“The imposition of some duties affects USD pricing as most goods that were not on VAT are now being charged for VAT,” he said.

Tanganda Tea Company weighed in, saying export proceeds continue to be subject to 25 percent mandatory liquidation at sub-economic exchange rates.

As a result, this implied significant tax on the topline reduces exporters’ competitiveness and their ability to reinvest export proceeds into value addition and growth in exports.

The International Monetary Fund (IMF) European department deputy chief, Wojciech Maliszewski, said at a press conference in Harare on Wednesday that the restriction on the 10 percent allowable trading margin for pricing domestic transactions should be eliminated.

“We have been extremely concerned about the exchange rate depreciation, which began in December and then began to become rapid, which led to the substantial increase in prices of basic commodities in the Zimbabwe dollar (terms),” Maliszewski said.

“The thing that needs to be addressed is the exchange rate distortions. There are some restrictions, like the 10 percent incentive margin for forex trading. There is a pricing cap of 10 percent on the official exchange rate, which we see as an exchange rate distortion.

“There is a need for the government and Treasury to focus on addressing the currency issues to restore macroeconomic stability.”

-ebusinessweekly