The Sunday Mail
“The economic rebound experienced since the end of hyperinflation in 2009 has ended. After averaging 10 percent from 2009-2012, growth fell to an estimated 3.3 percent in 2013, reflecting tight liquidity conditions… weak demand for key exports, competitiveness pressures…”
There is this new religion in town that is virally converting people into believing that the falling prices of local products is a good thing, and that it is as a result of increasing competitiveness and enhanced efficiency in the manufacturing industry.
Their gospel goes on to claim that the falling prices of locally manufactured goods are a result of local industrialists trying to compete with cheap imports from South Africa, our biggest trading partner.
Apparently, South Africa’s exports to Zimbabwe have over the past few months been incentivised by the depreciating rand. But how far true are these assertions?
It is my premeditated view that we need to carefully interrogate the status quo with a view to coming up with meaningful interpretations on the ideal scenario to guide optimal policy interventions, especially noting that we are likely to see the Finance Minister and central bank Governor presenting their mid-term fiscal policy review and monetary policy review respectively soon.
I would like to therefore contest, in the context of deflation which has gripped our economy, that the falling prices of local products is not something to smile about, as it is a lucid manifestation of the symptoms of a disease that we need to urgently fight – lest we lose our hitherto economic gains.
Deflation, which is negative inflation, emerged in the economy a few months ago and apparently it is being coined differently by different people.
The past president of the Bankers’ Association of Zimbabwe, for example, is on record as saying “we have a negative inflation rate, which is a good thing.”
Mr John Mverecha, a top economist, is also on record as saying, “Deflation always impacts severely on the poor.”
Our transition from low inflation to deflation has brought all these mixed feelings that sometimes confuse people on whether or not to celebrate this new phenomenon.
In Shona there is an adage that says “uchafarira n’anga neinobata amai”. Is deflation not that type of n’anga? It reminds me of Christine Lagarde’s (IMF managing director) words that, “If inflation is the genie, then deflation is the ogre that must be fought decisively.”
In my view, the main reason why we are seeing prices of local goods falling down is because of the steadily falling aggregate demand, as a result of the persisting and worsening liquidity situation in the economy.
Last year, the growth in aggregate demand was estimated at 5 percent, a fall from 13 percent experienced in 2012.
The 2014 National Budget partly attributed this to “declining private consumption due to squeezed disposable incomes.”
By then, inflation had decelerated to 0.54 percent, and according to the National Budget, that deceleration “reflects weak aggregate demand emanating from tight liquidity and, hence, low disposable incomes…”
Since we are now in deflation, it is self-evident that aggregate demand has actually fallen further from the 2013 figure of 5 percent.
What this means is that more and more people are failing to afford goods and services. When aggregate demand falls, aggregate supply swiftly reciprocates, leaving the general price level lower than before.
Just imagine what happens to the general price level as aggregate demand continues to fall, as in our case!
Further decline in aggregate demand is caused by consumers who actually have the money to spend but stop buying, hoping that the falling prices will fall further. As this cancer spreads, the situation gets worse.
It is therefore crucial to dispel the erroneous impression that local manufacturers are reducing prices because they are becoming more efficient and competitive.
The hand choking the industry’s throat is actually getting firmer and tighter by the day, with reports from NSSA saying that at least 10 companies are going bust every month, and the ZCTU also saying that about 3 000 employees have been retrenched to date since January.
Industrial capacity utilisation has been actually falling down perennially since 2011, from levels of 57 percent to 39 percent last year.
This year it is projected to fall further. What this means is that industries are actually becoming uncompetitive, and now incurring dis-economies of scale.
They are only being forced to reduce prices due to the market forces holding a gun at their heads. No competitiveness here. No efficiency to talk about either. The sad reality is that as the industry now incurs more production costs, due to falling capacity, their profits are actually shrinking. So much for the private sector chiefly driven by the profit motive.
In its recent Article IV Consultation with Zimbabwe, the IMF diagnosed the same ailment about our economy.
The Fund said: “The economic rebound experienced since the end of hyperinflation in 2009 has ended. After averaging 10 percent from 2009-2012, growth fell to an estimated 3,3 percent in 2013, reflecting tight liquidity conditions… weak demand for key exports, competitiveness pressures…”
For an economy that has been in recession since 2011, deflation is just that ogre that will catalyse the fall, taking it into a fast lane, if let to persist. We should quickly act and avoid becoming like Japan, where deflation wormed itself into the system.
Some are also arguing that local producers are deliberately reducing their prices in order to compete with imports whose prices were also falling.
I really doubt if business has the capacity to do that right now, looking at the shoestring nature of their pricing models.
All manufacturers’ pricing models factor in production costs. Why then would they lower their prices when their cost per unit is rising, while profit per unit is falling down?
Reducing their prices further will actually push them to the loss zone. We are also talking about players driven by self interest here.
The adverse effects of deflation are already manifesting wherever one sets eyes on in the economy. If you look at the current loan default rates, you will see appalling revelations.
Take the Kurera/Ukondla Youth Fund, for instance, which had a default ratio of more than 60 percent. For a fund that is supposed to be revolving, it simply means that the next youth setting sights on the fund will not access anything from it.
This is because deflation increases the real cost of borrowing and the real burden of existing debt. The ogre also discourages investment, and the companies faced with high production costs might be forced to retrench workers, handing them over to the hungry unemployment ogre.
Do we need all this, for an economy that is already battling with other serious economic issues?
The mid-term fiscal policy statement as well as the monetary policy review should come up with a strong concoction to heal the deflation malediction and save our economy.
Our serious commitment to deal with deflation should be vividly highlighted in these two critical policies. Even the IMF encouraged Zimbabwe, in its Article IV Consultation report, to fully implement its revised fiscal plan for 2014 and be ready to take additional actions if needed.
Already government has been moving along that direction, by taking the indigenisation policy back to the workshop.
The intention is to make it bait that fishes investment from outside the country, as domestic-led recovery is tricky under the current tight liquidity conditions.
Foreign direct investment is one crucial factor that will therefore boost our aggregate demand, to move the economy out of the current red zone.
We need more foreign investment to resuscitate our productive sectors and to start new value addition and beneficiation projects in line with Zim-Asset.
That will bring competitiveness and ensure that more people are employed and competitively remunerated. When the generality of people start to earn decent wages, they will regain their spending power to buy more, thereby spurring aggregate consumption to intended levels.
Our industry is currently operating with antediluvian machinery, the majority of which dates back from the pre-independence era.
It will be difficult for us to increase the manufacturing sector’s contribution to exports to 50 percent, as espoused in the Industrialisation Development Policy with this industrial scrap. At the moment more than 80 percent of our exports are dominated by raw materials, which is akin to empowering other nations with jobs.
We need to replace the industrial scrap with modern machinery and technology that can bring international competitiveness to our local industry.
Conscious of the fact that new machinery is expensive to acquire, the best strategy is to start with upgrading our machinery to fairly modern standards and the SMEs sector should be at the forefront of that initiative.
We can bring low-cost second-hand, but fairly modern, machinery from abroad to replace our antiquated machinery and the taxman will also promote that by not levying any duty.
The second-hand machinery, combined with some of our local comparative advantages, will allow us to hastily reclaim our economic destiny.
Many folks have been getting bank loans to import second-hand vehicles which require running expenses on a daily basis.
Zimstat says that we imported a whopping 206 519 vehicles last year worth $606 million.
Now imagine if we had imported 206 000 small and modern second- hand machines processing various local resources, from timber, soya, granite, you name it.
This is the road that can bring low prices for our local goods which commensurate with sustainable competitiveness and efficiency of the manufacturing sector.
As we seek to get out of deflation, Government should also expedite all capital expenditure projects highlighted in the National Budget, and rationalise unnecessary imports while also tightening our porous borders to avoid smuggling.
Our exports, which are highly concentrated, need to be diversified by developing new lucrative markets. Priority should also be placed on mechanising our border posts so that those who pass through can interface with machines, in order to weed out rent-seeking predispositions.
More work should be done to come up with ways of how the taxman can tap into the informal sector to collect revenue in a cost-effective way, while also descending on companies that are shying away from the taxman.
These are some of the low-hanging fruits that can arouse our falling aggregate demand.
The current fallacy of linking the fall in prices of local products to increased industrial competitiveness should not be allowed to bestow false hope on the policymakers, leaving them not taking urgent action on deflation. Industry is down and is actually being worsened by these price reductions.
It’s just terrible!
