Macro-economic instability to haunt firms into 2024
MACRO - ECONOMIC instability characterised by rapid exchange rate depreciation and inflationary pressures are the major challenges that adversely impacted on operations of many companies this year, according to analysts.
In separate interviews, economic analysts said, in 2024 the Government and policymakers should be proactive and pre-occupy themselves with policies that reverse the prevailing situation.
Renowned economist, Professor Gift Mugano, said while there are some notable positives registered in the economy this year, one of the key challenges that continues to haunt the economy is the depreciation of the exchange rate and inflationary pressures.
“The biggest challenge for business this year has been macro-economic instability characterised by the rapid depreciation of the exchange rate — mid-year (May/ June) it was quite massive and of course inflation pressures.
“So, what it does is it makes it very difficult for businesses to manage or defend their capital, ‘defend’ their capital because the role of managers and directors were relegated to protecting companies’ net worth.
“In the presence of runaway exchange rate, naturally you lose capital and the company will be shrinking and that was a real challenge and it’s still a challenge because the black market rates are now around US$1: $10 000,” he said.
Fiscal and monetary authorities have been trying to tame the runaway inflationary pressures as well as stabilising the exchange rate through various interventions including continuing with a tight monetary policy stance, introduction of the gold coins and digital tokens.
Consequently, at some point this year, the exchange rate and inflationary pressures got subdued.
“But inflationary pressures and exchange rate are picking up again and I am emphasising this because it means we are getting into 2024 with the same problem.
“So, the Government has to be pre-occupied by this challenge and I think that’s one of the leading challenges they must be preoccupied with.
“The only incentive which the Government can give to the private sector is macro-economic stability underpinned by a stable exchange rate, low inflation and strong currency and the rest doesn’t matter — that’s why you see in some economies, taxes are very high but no-one complains because there is that stability,” said Mugano.
During the course of the year and as part of their survival strategy, he said, businesses have tried to get their hands on the US dollars to protect their capital.
But the challenge now is that the prices in US dollars were falling and this, Prof Mugano said is an indicative sign that demand is not there, pushing more to the US dollar economy when liquidity is not much in the market.
“As long as the prices in US dollars are falling, its testimony that we don’t have much liquidity in that market again and the challenge of a US dollar economy, it also causes the shrinking of companies in term of the size of the asset base because the sales will not be large enough as it were under normal circumstances when the economy is stable.
“The retail sector, during the course of the year was also hit hard because of the stiff competition between the informal and formal sectors,” he said.
“The nature of businesses in the formal retail is not that cash-related, they need credit at a time were companies also are not getting favourable terms when securing loans; interest rates I am told in the banking sector for US dollar denominated loans, they go as high as 23 percent . . . so what kind of business will you be doing to give you a margin above 23 percent to guarantee your capacity to pay back that loan and also to guarantee profit.”
As a result, he said businesses would then prefer cash terms with the informal traders as opposed to formal traders like retailers who want credit terms.
“So, it’s been a kind of survival of the fittest this year and that is the real issue and we still have that issue with us,” he said.
On the positives registered in the economy during the course of the year, Mugano said the performance of the external accounts has been always good in terms of surplus narrowing down to around US$300 million supported mainly by Zimbabweans in the diaspora.
“That has been very good because we are getting around US$2 billion from the diaspora and it has been useful in oiling this economy and keeping us going helping everyone to remain afloat.
“Imagine if there were no receipts of foreign currency from the diaspora of that amount, we could be very squeezed,” he said.
Commenting on mining and agriculture sectors, which are the major centerpieces for the country, Mugano said notable investments and transformative policies have been recognised during the course of the year.
“The developments happening to Manhize are very positive because that steel manufacturing firm is a game changer in terms of cutting imports of steel and generating exports as well.
“If it’s going to start producing, we are going to cut the import bill. The activities in the mining sector are quite massive across a number of minerals,” he said.
A Chinese firm, Dinson Iron and Steel Company (Disco), is constructing a US$1,5 billion steel manufacturing plant in Manhize near Mvuma with the steelworks project expected to be commissioned early next year.
“We also see a lot of developments in the lithium sub-sector and we like that because it helps us build the muchneeded foreign currency.
“What is very critical is to push the agenda of value addition and we can do more given the importance of lithium in the newer agenda of green economy,” said Mugano.
He said the move to push more relevance in terms of the commodity exchange in the agriculture sector is commendable as strategic crops like maize and wheat are now traded on the Zimbabwe Mercantile Exchange.
“Maize and wheat are now part of the commodities that are traded on the commodities exchange, it’s a good development from a policy perspective.
“We have always been raising concerns that we need to create a viable market ecosystem for the agricultural sector to bring in the private sector to play a critical role in funding agricultural production and also marketing of the same commodities,” said Mugano.
Another economic analyst, George Nhepera, said authorities have not made significant strides in as far as stabilisation of the exchange rate and inflation is concerned.
“Our policies, though we have seen policies from the Central Bank such as the introduction of the gold coin and digital token, which were meant to help in the stabilisation of inflation and exchange rate, have not made much progress in as far as that issue is concerned.
“Hopefully in 2024, there will be other alternative policies authorities would come up with to help us in that regard. The black market exchange rate is almost past the US$1: $10 000 rate against the interbank which is at US$1: $6 400 so that 20 percent or less premium as expected by the IMF we are nowhere near that.
“That’s a policy issue that has to be attended to,” he said.
Nhepera said Zimbabwe this year continued to reel under lack of access to international capital due to the high country risk profile that is inhibiting local businesses to offshore credit.
“Economic growth is still constrained by so many factors for example, electricity generation is still a challenge, industry is complaining of not having enough power required for the production of goods and services,” he said.
On the positive side, he highlighted that it is gratifying to note that a peaceful environment continues to prevail in the post-elections period, though with some incidents of politically motivated violent elsewhere in the country.
As a result, he said peace has a positive impact on the overall business operating environment and now that elections have been held, focus was now on reaching consensus between the Government and the private sector as well as all other stakeholders.
In a separate interview, economic commentator Chipo Warikandwa echoed similar sentiments as Nhepera adding that it is critical for policymakers to craft policies that promote economic growth and development.
“What is important for the country going forward into 2024 is to come up with policies that attend to the economic quagmire that the country is faced with,” she said.