REVISING THE MANUFACTURING SECTOR PERSPECTIVES TO SUIT THE EMERGING ECONOMY

08 Mar 2018
511 times

Zimbabwe has been known to have the most diversified manufacturing sector within the region pre-2004, it was characterised by a strong and well organised value chain which was traceable from the source to the ultimate market. The turn to a dollarized economy led to a summersault shift in the structure of the economy, however this was preceded by the land reform process as well as trade and economic sanctions which were imposed upon Zimbabwe starting with the Zimbabwe Democracy and Economic Reform Act [ZDERA].

 

The Emerging economy has to be clearly understood, it encompasses an economy dominated by black, native entrepreneurs, it refers to an economy where the backward linkages where the real sector; mainly Agriculture, Mining as well as Manufacturing belong to the black populace. It also refers to an economy where 99 year leases defines land ownership more than any other land tenure regime, the emerging economy is characterised by deflation contrary to the stubborn vice of inflation which used to trouble this government since the early 90s when Economic Structural Adjustment Program [ESAP] was adopted , an emerging economy is also defined by a dollarized economy which by default has left Zimbabwe with the strongest currency within the region regardless of weaker economic fundamentals on the ground.

Indeed, there is serious need to revise the manufacturing sector perspectives in order to suit the emerging economy. A mere fact that the land ownership has skewed to the black populace implies that the traditional value chain has been disturbed, the same white farmers who use to own manufacturing firms as well as retail shops o market their produce are gone, and the disaster ensues when our bankers continue to fund manufacturing firms whose umbilical cord had already been broken through changed ownership structure. The end result was moral adverse as funds intended for capitalising such firms will be diverted to consumption activities.

The dollarized economy was characterised by the undervaluation of the greenback with wide opinions arguing that the US dollar is undervalued by more than 40% within the domestic market. This meant pricing structure from the utilities [electricity, water], as well as salary levels were already perched too high which would mean our manufactured products will ultimately become uncompetitive on the international markets. Recent reports suggests cases of supplies for reputable organisations being forced to revise their price levels downwards , in some instances to as much as 40% and this can only create a gridlock of settlement risk as some will be permanent victims of the abruptly revised pricing framework.   

We have a clear case of perennial mourners who still expect ZISCO Steel, ZIMASCO, Zim Alloys, Zimcast, David Whitehead, NRZ, Zimglass and other companies to open their doors to the public in the short term period. I am convinced the earlier the better as a nation which should not expect these corporate to be capitalised the better. One area we need to seriously revise is the foreign direct investment [FDI] component, as to date, it is contributing only about 3% as a source of liquidity and as long as FDI inflows are still low, we should remember there is no financial institution with the capacity to fund such companies. Some of them have to be allowed to die a permanent death as the only way to divert the meagre resources we have into productive use.     

Infact this emerging economy may no longer have space for some of the yesteryear corporates, they flourished under conditions were quantitative easing by both the central bank and the treasury would allow them to thrive, with current liquidity challenges coupled with the threats of Chinese, South African and Indian products, they is certainly no hope in sight to revive them.

The openness of Zimbabwean border should also compel us to have a new perspective on our manufacturing sector. Remember China, India and Russia are also great producers of steel and this should leave us with the question; to what extent can ZISCO Steel come out of the wood, this is without factoring in frequent power outages within the country, liquidity crunch will made most banks buckle, unfriendly labour laws which have just been maintained by the promulgation of a labour act which makes labour very inefficient.

Companies being made to pay US dollar salaries for employees who serve under the Zimdollar when the real exchange was tilting heavily against the then local currency can only worsen the burden to employers. We are still clamouring for reforms even in the new labour act which includes reviewing sections which are not clear like the National Code, making the leave and retrenchment conditions less generous and reviving a legislated National Productivity Institute in Zimbabwe. Maternity leave, being a constitutional right, should be provided for by the state. A Redundancy Administration Fund to cater for employees being retrenched should reduce the financial burden on the individual employers as the cost will be shared by all employers and employees and the investment income will cover some of the costs. This will be guided by relevant regional comparisons. It is certainly misleading to analyse Zimbabwe’s manufacturing sector without opening the ‘green lense’ of labour costs.

On trade related matters, the manufacturing sector definitely has to suit the current realities where a product manufactured in Rio De Janeiro, Caracas or Honolulu will just need a few days to reach Zimbabwean market. Other countries had improved their logistics infrastructure to the extent that they can bake a loaf of bread to deliver in Harare, this means revising our manufacturing sector perspectives.

Many manufacturing businesses reported that despite the low tariffs on imported materials [5%], the current protection against imports is still not enough even after the midterm Budget review which saw some of the second hand commodities such as garments being banned. Regional businesses have relatively low production costs in addition to their exemption from paying high tariffs under the SADC and COMESA agreements.

In this respect, we want tarrifs on imported raw materials to be suspended while tarrifs on finished goods to be increased. However we are cognisant of the possible unintended consequences which are price increases from increased protection which can be detrimental to consumer welfare.

An interesting observation however is that according to a ZEPARU report commissioned by ZNCC, imports subject to tariffs constituted just 3.4% of total imports in 2013. The report suggested that manufacturing is hit much harder by the poor state of electricity, water and railways. The report also noted, apparently, in surprise, that some firms have been lobbying for tariff protection. There is an inelastic demand for imports, so imposing tariffs results in higher prices rather than alternative sourcing and also raising tariffs is in breach of SADC and COMESA obligations [in the case of SADC to work towards the elimination of tariffs, and in the case of COMESA, not to introduce new and not to raise existing tariffs].

This by implication therefore means continuously blaming trade measures as threat to the growth of manufacturing sector without interrogating other new characteristics of the emerging economy which includes shortages of utilities [water and electricity] might lead to poor diagnosis of the real challenges facing our economy. It is unfortunate the new emerging economy also has to do with the bads which includes operating a ‘generator economy’ which costs on average  X 1.8 the normal electricity charges.

In revising the manufacturing sector perspective to suit the emerging economy, it is also pertinent to emphasize on competitiveness. We can bring back the manufacturing sector of 1997 but will it stand the test of recent times? A simpler definition of competitiveness is “sustainable growth in productivity that improves the lives of the average person”. It is our clarion call to the government of Zimbabwe to expedite the setting up of a National Competitiveness Commission. So far more than 30 countries in the world operate such a competitiveness body and it had managed to produce miraculous results.

In Ireland, such a commission was established in 1997 with the leadership of the Head of State, the commission rigorously benchmarked Ireland with the best in class. The results in a space of years included the economy growing by 75%, GDP per capita rose from 67% to 90% which is the EU average, Exports rose from 53% to 84% of GDP, FDI stock rose from $3.8 billion to $8.1 billion and Unemployment declined from 16% to 5%.

Another case is that of Croatia. Prior to 2002, there was limited interaction and coordination between the private sector and the public sector. With the need to reform and integrate the Croatian economy into the region, leaders chose to form a council to jointly address the economic reform priorities. Business and government leaders joined together to form  a council in February of 2002 as a unique body with 22 representatives from 4 different interest groups which are ; The economy, The government, Trade Unions as well as Science and Education[ mostly university professors and reactors ].

The results from Croatia were so amazing; the country jumped 13 places in the World Competitiveness Rankings from 2005 to 2006. About 55 Recommendations of the Croatians Competitiveness Commission were handed over to the government in an open forum and sought out ways to focus on their implementation, thereby demonstrating bipartisan sustainability in support of a national private –public dialogue process.

As a result, the national dialogue in Croatia was transformed from” Croatia national economy versus European open economy” and now pivots around the question of “how do we build a competitive economy”.

Therefore the role of competitiveness commission cannot be over-emphasized in Zimbabwe’s quest to build a manufacturing sector which will suit the realities of the new emerging economy.

Zimbabwe ranks number one in the world in terms of inflation, thanks to the government’s bold steps and the macroeconomic environment is perceived to be relatively stable. The government’s bold decision to adopt the multi-currency system enabled the country to end hyper-inflation and to have the world’s best inflation ranking. However this has come at a cost which includes being linked to a relatively strong currency, limited control over monetary policy, lack of liquidity and relatively high costs of lending even in foreign currency denominations. All these factors do impact directly on the competitiveness of the manufacturing sector.

Failure to revise our perspectives on the manufacturing sector also means missing out on benefitting from the entire value chain. A number of manufacturing firms in Zimbabwe were mainly agro-processing firms and these included Dairibord Zimbabwe, Cairns, Hippo Valley, Bata Shoe Company and many others. With the new emerging economy where the greater agriculture sector emanates from tobacco, the reality is most of the yesteryear manufacturers can no longer stand the current market dynamics as depressed produce from the farms will compromise their chances of survival.

Access to finance remains a major challenge in this new emerging economy as most banks are sitting on higher levels of nonperforming loans. The number of financial institutions significantly decreased in 2000. They are prohibitive interest rates which are offered over short tenures. It is also difficult to fund subsidies due to lack of liquidity and financial resources.

It is also pertinent to appreciate that agriculture constraints are constraints to the manufacturing sector as well, as they impair the flow of raw materials; such constraints includes shortage of inputs, adverse environmental conditions, lack of appropriate and affordable funding, human capital constraints, poor infrastructure and marketing weaknesses. 

    

Last modified on Thursday, 08 March 2018 11:05
Rate this item
(0 votes)
Login to post comments

Zimbabwe National Chamber of Commerce is a non-profit making membership-based organisation that provides services designed to support its members in business development.  

Facebook Feed Display