‘Stability has come at huge cost to business’

THE Confederation of Zimbabwe Industries (CZI), the country’s largest industrial lobby, says exchange rate and inflation stability, widely vaunted by authorities as the foundation for sustained long term stability, has come at a huge cost for business.

A cocktail of monetary and fiscal interventions, including steep bank lending rates and demands for repricing of overstretched public contract invoices, have spawned a liquidity crunch that is now threatening to choke many businesses, amid falling consumer demand.

Zimbabwe has seen marked exchange rate and inflation stability since the Treasury directed Ministries, Departments and Agencies (MDAs) to review prices on all existing invoices, under the value for money policy framework, to ensure they were fairly priced using willing buyer-willing seller exchange rates.

Prior to this, the Southern African country had seen annual inflation reach a post dollarisation high of 837,5 percent in July 2020, before a sustained decline saw it drop to a two year low of 50,1 percent in June last year.

Since July 2021, the annual and monthly rates increased exponentially, touching 285 percent by August 2022, after which the monthly rate started retreating, with authorities saying this would be sustained while the annual rate would soon follow suit.

Zimbabwe’s reintroduced domestic currency, which was reintroduced in 2019 at $2,5 to the greenback and reached a high of $850/US$1 on the parallel market has gained to $700/US$1 on the same market while exchanging at $604/US$ on the interbank market.

However, some economists argue that the current stability is only temporary after the Treasury slowed down on payments for supplies to public entities for supply of goods and services, suggesting all would unravel if the payments resumed.

But as reported in our lead story, secretary for Finance George Guvamatanga dismissed it as fallacious, anticipating the economic situation would turn upside down if the Government resumed spending, further pointing out that payments were ongoing for rightly priced invoices.

The Government expected, Guvamatanga said, all economic agents to review downwards their pricing, which had previously been pegged using parallel market exchange rate in light of the now evolving economic stability.

Guvamatanga said authorities had to intervene in time to rescue the entire economy from a damaging “overheating” mode.

But CZI president Kurai Matsheza noted that while the prevailing stability was welcome, it had come at a huge cost to businesses, which are experiencing rapid fall in aggregate demand and constrained access to working capital funding.

Businesses have suffered a double whammy.

While the Government has “closed the taps” on payments for public contract invoices, the central bank increased bank statutory reserves and hiked its bank policy rate to global records in efforts to squeeze market liquidity and discourage speculative borrowing.

“The stability we wanted; but it has come at a huge cost to business, it is creating other problems. Obviously, the exchange rate developments and inflation; month on month (inflation) is coming down; it is a welcome development, but it’s the cost of achieving that.

“It is threatening aggregate demand, we are seeing factories are not able to really borrow because of the high interest rates, so really if this thing carries on like this, we will see (production) volumes significantly coming down,” he said.

This comes after the central bank hiked its bank policy rate, already the highest in the world at 80 percent then, to a record 200 percent as it sought to stymie speculative borrowing, which was also driving speculation on the stock and currency markets.

“We hope the authorities will do other things to make sure (the situation improves). We want the Government to start spending again so that it can oil businesses and to create liquidity in the market,” Matsheza said.

Asked whether, as business leaders, they were not worried that if the Government resumed spending to previous levels this would reawaken “the demons’ that stoked exchange rate and inflation rampage, which negatively impacted the economy, Matsheza differed.

“Government spending will not create that problem, it depends how they are spending; where do they get the money to spend. If they are spending the money they are getting from taxes; that is money supply neutral,” he said.

The CZI president said the business lobby was convinced that however the Government spends the money it earns, as long as that is money supply neutral, doing so would not cause problems to the economy, but “ if they start printing”.

Matsheza said demand was coming down as a result of diminishing purchasing power, acknowledging though some drastic measures had been necessary to rein in the exchange rate and inflation resurgence, also fueled by forward pricing by businesses.

“But with the stability that has been coming in for the past couple of weeks, we think our pricing will also become stable, as the rates (official and parallel exchange market rates) appear (to) be converging,” Matsheza added.

Economist professor Gift Mugano shared similar sentiments as Matsheza saying given that the Government was the biggest spender in any economy, it followed that its reduced spending would negatively impact business and the economy.

“The moment the Government stops spending, you expect economic contraction. The minister of finance will not be able to guarantee even the revised growth rate target of 4,5 percent. He will find himself lower than that.

“We can’t survive this, to be honest because, as much as I agree that the Government is right in putting scrutiny on Government procurement processes, what needs to be done is that we need to do this conservatively, (otherwise) these companies will collapse.

“There is a contagion effect; it’s also going to affect service delivery because contractors and even service providers will collapse and whatever is happening, economically, will just collapse.

“What is evry critical to sustain stability, the Government must ensure a competitive bidding process so that we do not have monopolies supplying the Government. In that, you then take away the issue of moral hazards.

“In some cases, we must eliminate middlemen because why would you want to buy from Mugano Holdings dairy products yet there is Dairibord and Nestle? You (must) go straight; that needs to be done right away,” he said.

To avoid forward pricing, Prof. Mugano said local suppliers and contractors expected the Government to pay promptly, as this was part of major reasons that caused them to hedge against potential loss of value on payments from the Government.

He also said the Government should ensure convergence between the official and parallel market exchange rates. “The current convergence we are about to witness at $604/US$1 and $700/US$1 is a fake one; it is coming out of squeezing the economy, the moment they begin to pay it (rate) will run away.

Professor Mugano also said the Government should allow the private sector to take leadership in certain key sectors of the economy. For instance, he said Finance Minister Mthuli Ncube should follow through his promise in the pre-budget strategy paper to allow the commodity exchange to take centre stage in the financing of agriculture.

“That must be implemented now because what it does, it helps the Government to get out of funding agriculture for commercial farmers and the Government can continue to assist smallholder farmers; it’s known all over the world; even in Malawi, even in Zambia.

“But you cannot not fund commercial farmers who can be funded by value chains like through your agro-processors and the commodity exchange. So, at this stage, because we are going towards the rainy season, they must make that announcement now,” he said.-ebusinessweekly