Confederation of Zimbabwe Industries President Busisa Moyo
A CONFEDERATION of Zimbabwe Industries (CZI) 2015 Manufacturing Sector Survey yesterday indicated that capacity utilisation within the manufacturing sector declined by 2,2 percentage points to 34,3 percent this year, from 36,5 percent last year.
This demonstrates the failure of combined government and private sector efforts to arrest de-industrialisation, mainly due to the absence of affordable funding to bailout struggling local companies. The resultant liquidity crisis has also seen the cash-strapped government battling to raise monthly salaries for its workers.
The decline, which represents a cumulative 23 percentage points fall from 57 percent in 2012, is clearly an indication of a worsening economic crisis, which was this year exacerbated by unexpected factors such as the continued depreciation of the South African rand and the Zambian kwacha, which affected the competitiveness of local products priced in United States dollars, the anchor currency in Zimbabwe’s hard currency economy.
“We need a comprehensive crisis response strategy,” former CZI president, Kumbirai Katsande, told guests at the launch of the survey at a Harare hotel.
“We will not come out of this crisis with our suits on. This crisis is deep and it is likely to get worse. We had a problem with the rand, now it is the kwacha. If the kwacha has gone down dramatically, how do we respond because Zambia is our major export destination?” Katsande said.
In 2009, the inclusive government said it required US$8,3 billion to revive failed industries, fund social services and stabilise the economy following a decade of turbulence, which resulted in a cumulative 50 percent decline in gross domestic product.
But with the country still facing a global embargo that has been in force since 2000, industrial bailouts and packages have remained elusive, and the little amount coming in through bank-negotiated credit lines has been accessed at high interest rates due to the risk associated with lending to the country.
The lack of recovery, compounded by mixed policy signals from government, has affected business confidence, said the survey, which was unveiled by current CZI president Busisa Moyo, who described the research findings as critical to Zimbabwe’s economy.
Former CZI president, Kumbirai Katsande
“The weighted capacity utilisation has shed 2,2 percentage points from 36,5 percent to 34,3 percent,” the Manufacturing Sector Survey said.
“The constraints to capacity have remained the same since dollarisation: low domestic demand; capital constraints; antiquated machinery and machine breakdowns; and competition from imports. Of the respondents, 39 percent said they were operating at levels above 49 percent while the remainder (61 percent) said they were operating at levels below 49 percent,” said the CZI.
“On average, small companies (between five employees and 19 employees) are operating at 26 percent capacity utilisation while medium companies (between 20 and 99 employees) are operating at 36,1 percent. The larger firms (100 and more employees) are operating at 43,1 percent,” said CZI
Eighty-nine percent of 250 executives surveyed had doubts over 2016 prospects, citing high costs of doing business in a deflationary environment, which has piled pressure on production and output.
CZI said a combined 65,7 percent of industrial capacity utilisation was idle in 2015, 2,2 percentage points up from 63,5 percent in 2014 after more firms crashed under the weight of factors that include power blackouts and difficulties in accessing working capital and expansion from internal and offshore sources.
At -3,11 percent in September 2015, Zimbabwe’s inflation was among the lowest in the world.
It contrasts sharply with the hyperinflationary era of 2008 when the inflation shot past the 500 billion percent mark, paralysing industries and triggering capital flight.
Early this month, CZI launched its quarterly business confidence index, which showed that perception remains low, with a composite quarter-on-quarter confidence index of -33,9 percent and year-on-year of -37,2 percent.
The softening business confidence worsened, as highlighted by 71 percent of CZI survey respondents, who said they ploughed back profits, despite a tightening liquidity crisis, to fund expansion and operations.
This had dire consequences on the overall state of industries, CZI said, with companies producing at 34,3 percent of combined installed capacity, from 36,5 percent in 2014.
Generally, it means companies that were producing 100 goods in 1999 were now producing 34,3.
Less than 50 percent of respondents said they accessed financial lifelines from both the domestic and international financial institutions due to a high country risk profile.
Hostile policies such as the indigenisation law have worsened an already bad investment climate and aggravated resentments by business over the status quo. This has the effect of repelling foreign direct investment inflows (FDI) and keeping lenders on the edge.
Fewer companies are still in production compared to last year, after failing to cope with low domestic demand compounded by a carnage on the job market, where nearly 30 000 workers lost their jobs three months ago, in addition to company closures.
In total, 25 percent of surveyed companies cut jobs during the review period, and 46 percent of respondents said businesses were bleeding.
At the heart of the manufacturing sector’s concerns were antiquated machinery, machine breakdowns and competition from imports, especially from neighbouring South Africa, the continent’s second largest economy, as well as the Chinese, who have been given free room to dump inferior products into Zimbabwe every year, with ramifications on local industries.
Very little production is taking place in the country.
In fact, a combined 66 percent of industries’ installed capacity is grounded, and that is why State revenues failed to achieve targets by six percent during the first half of the year.
The consequences have been far reaching on social services like health, education and rehabilitation of public infrastructure.
“Zimbabwe’s economy faces many fundamental problems that will need to be addressed before any type of economic development can take place. Against the background of weak domestic demand, tight liquidity conditions and the appreciation of the US dollar against the South African rand, inflation remains in the negative, recording -3,11 percent in September 2015 and is projected to remain low in 2015,” the report said.
“Forty seven percent of the respondents carried out new capital investment in 2014 while 41 percent carried out investment in 2013. The bulk of the investment (97 percent) was directed at machinery and equipment for replacement (60 percent) and expansion (40 percent). Profit plough back remains the largest source of financing of new capital as evidenced by a response rate of 71 percent.”
CZI said 44 percent of respondents expected to increase their level of capital investment in 2015/2016, adding that the current economic environment remained largely deterrent to FDI, a major source of capital investment.
CZI has previously called for a review of legislations that have a bearing on FDI.
This includes the review of the Indigenisation and Economic Empowerment Act and the resolution of the debt overhang.
Strides have been made towards debt resolution with Zimbabwe’s strategy being accepted by creditors during International Monetary Fund/World Bank annual meetings in Lima, Peru this month.
The real exchange rate overvaluation relative to the South African rand has caused a serious loss in external competitiveness, as it has made imports cheaper than domestically produced goods while making exports more expensive.
As a result of increasing demand for imports and dwindling exports, the external sector position continued in deficit, with an estimated current account deficit of US$3,1 billion this year.
“However, the economy continues to be able to finance this gap and at the same time still show growth in bank deposits. In the absence of lines of credit, this is a remarkable achievement. Exactly how we are achieving this feat is not well understood and merits further investigation. Volatile and fragile global financial environment, subdued levels of FDI coming into Zimbabwe compared to peers in the Southern African Development Community, decline in global commodity prices for Zimbabwe’s main mineral exports — gold, platinum, and diamonds — which were already facing high production costs, negatively impacted the fiscal and external accounts.”
CBZ Holdings chief executive officer, Never Nyemudzo
Unclear signalling through sometimes contradictory positions taken by different arms of government and lack of clarity on the Indigenisation and Economic Empowerment Act has become a deterrent to FDI, CZI noted.
“Most respondents felt that the conditions are poor or deteriorating and are not conducive for business growth and development. The need for policy certainty and consistency can never be emphasised enough and the creation of an enabling environment for business development is paramount. Some respondents felt that currently, over and above the inconsistency, there also were too many restrictive policies and the economy needs major changes and a business friendly environment. The need for FDI is also key to addressing some of the economic challenges the country is facing,” said CZI.
Industry and Commerce Minister, Mike Bimha, indicated that government had put in place several measures to help industries avoid collapse.
“There are things that we have done but we will not see instant results,” said Bimha.
Former CZI president, Joseph Kanyekanye agreed, saying if government had not taken some preventive measures, there would have been more trouble for companies.
CBZ Holdings chief executive officer, Never Nyemudzo, said the banking group, which sponsored the survey, had reduced interest rates to make funding cheaper for industries.
He, however, said future surveys should clearly elaborate areas that required funding so that the banking industry could come up with packages that suited industrial needs.
“We are reducing lending rates to help industry improve competitiveness,” said Nyemudzo, adding that the bank would unveil long term loans and funding for small to medium scale enterprises.
SURVEY HIGHLIGHTS
The 2015 Manufacturing Sector Survey shows a decline in the sector compared to 2014.
* Weighted capacity utilisation shed 2,2 percentage points from 36,5 percent in 2014 to 34,3 percent in 2015.
* The source of competition remains largely unchanged with 63 percent of respondents indicating they face competition from both local firms and foreign firms while 11 percent face foreign competition only.
*Twenty three percent compete with local firms only. South Africa remains the largest competitor to Zimbabwean producers followed by China.
*Forty seven percent of the respondents use mark up over cost as a pricing mechanism while 27 percent are market price takers. Imports continue to play a significant role in the pricing of local products with 12 percent of the respondents basing their prices on import prices. Negotiating with buyers is becoming a popular pricing mechanism in Zimbabwe with 10 percent of the respondents indicating that they use this strategy.
* Eighty four percent of the respondents indicated that the state of infrastructure is either poor or very poor. Sixteen percent of the respondents indicated that the state of infrastructure is moderate while no respondents pointed to good infrastructure. Respondents indicated that the infrastructure is unable to sustain economic growth (90 percent) while 10 percent indicated that this has no effect on economic growth.
* Seventy six percent of the respondents indicated that they did not change their working hours. Of the respondents that had indicated having changed working hours, the changes were due to a drop in aggregate demand which necessitated reduction in output hence the change. Twenty two percent of the respondents were forced into changing working hours to reduce labour costs and enhance viability and also due to inability to pay.
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