Zimbabwe industry feels the heat as sales drop

Published: 14 June 2019

Prices of goods and services may have reached the plateau, amid indications volumes have started dipping significantly as consumers struggle with affordability, captains of industry and economic analysts say. In fact, economists warned firms may collapse or fail to meet their obligations if they spend huge amounts buying expensive foreign currency to import products whose prices will be beyond the reach of many.

Zimbabwe is facing acute shortage of foreign currency, but is dependent on imported raw materials or finished products due to production issues in key sectors including agriculture, manufacturing and mining.

Finance and Economic Development Minister Professor Mthuli Ncube is on record labelling the pricing model synchronised or indexed to parallel market rate as bad economics, saying pricing should track movement and direction of inflation rate. The Treasury chief also stressed the fact that while businesses where using the black market to procure foreign currency for key imports, it was impossible that prices should increase by similar margins or higher.

The Treasury chief pointed out that when exchange rates increase, not all imported products may have 100 percent foreign currency component in their procurement, hence prices must not to change by the same factor.

The Confederation of Zimbabwe Industries (CZI) immediate past-president, Sifelani Jabangwe, said the domestic prices may have reached a level where it may no longer be sustainable to continue upward adjustments.

Prices of goods and services in Zimbabwe have since September last year largely tracked movement of foreign exchange rates on the parallel market for foreign currency, where business obtained the forex.

Wild price hikes are also fuelled by speculation and profiteering as well as the need to hedge against inflation to preserve value and cushion replacement cost.

Consequently, Zimbabwe's annual rate of inflation sky-rocketed from 5,39 percent in September last year to 75,8 percent in April this year, and remains under extreme pressure on the back of recent prices increases.

The majority of businesses in Zimbabwe rely on the parallel market to obtain the hard currency that is needed to import raw materials or finished products, as they could not get allocations from the central bank.

Even after the Reserve Bank of Zimbabwe liberalised the foreign exchange trading through introduction of the interbank market for foreign currency, businesses have struggled to secure adequate foreign currency given Zimbabwe's low export earnings and lack of external sources of funding.

Jabangwe said a northward trajectory in price adjustment may no longer be sustainable on the back of falling volumes, as consumers struggle to afford goods and services due to inelastic disposable incomes.

"Volumes have already come down significantly and we need to deal with what is keeping the prices up there and right now the rate of the RTGS to the US dollar has exceeded what it should be because the products are no longer affordable to consumers," Jabangwe said yesterday.

"So, we do not expect the rate to keep going up, but already it has exceeded the rate where we expect it to be. There is needed to address that issue and we believe it is as a result that there is no appetite for RTGS in the economy," he said.

Minister Mthuli said Government expects pricing models to become more rational and predictable by end of this year.

Delta said recently it had stopped charging for some of its products in forex following a significant improvement in access to foreign currency on the interbank market, which has stuttered since introduction in March.

With many businesses dependent on the black market for foreign currency in order to be able to import finished goods or critical manufacturing raw materials, the pricing for most products reflected huge premiums of buying forex on the black market, which is driving prices sky-high.

Economist Dr Gift Mugano said firms spending huge amounts of the local currency on buying foreign currency on parallel markets in order to import raw materials or finished products could face challenges turning over their stock, which may constrain capacity to meet future obligations.

However, Dr Mugano said while there was no confidence in the RTGS dollar as a currency and store of value, as it continues to lose ground against the greenback, the speculative pricing by businesses was not sustainable relative the incomes the majority of people have at their disposal.

"They (businesses) are not going to sustain that level of prices, in fact they are going to sink, they are not even going to swim, they are going to sink because the pricing we are seeing now is manipulated," Dr Mugano said.
- eBusiness Weekly

Tags: Industry,