CZI laments poor price discovery, policy inconsistency

13 May, 2022 - 00:05 0 Views
CZI laments poor price discovery, policy inconsistency Kurai Matsheza

eBusiness Weekly

Michael Tome

Price discovery and policy in-consistence among other key issues boggling businesses, dominated deliberations at the Confederation of Zimbabwe Industries (CZI) 2021 manufacturing sector survey report launch in Harare on Wednesday, with industry players imploring Government to come up with lasting measures to address multiple exchange rates characterising the market.

Businesses bemoaned the existence of two formal exchange rates in the local economy that came in form of the weekly auction rate and the interbank rate in addition to the damaging parallel market exchange rate that is being commonly used as a benchmark pricing by many service providers.

Industry players implored the Government to relook and have an effective price discovery model that will allow the convergence of the many exchange rates.

According to Wednesday deliberations, improving the exchange rate pricing is what will stabilise the economy and provide some room for industry to continue on the growth trajectory experienced in 2021.

At the start of the auction system, and a stable operating environment in 2021, parallel market premium went down by 20 percent, inflation was on a downward trend, industry capacity utilisation was on an upward trajectory, while investments in new projects were witnessed, a position that cannot be attained in an economy with varying foreign currency pricing.

The meeting further decried the willing buyer willing seller arrangement saying it was not working efficiently especially given that the central bank was instructing rates at which the currency was supposed to trade.

Addressing the delegates on behalf of CZI president Kurai Matsheza, his deputy Victoria Jakazi, said authorities should come up with effective exchange management, a position that would direct everything to fall into place.

“The fundamental issue is exchange rate management and we have been making this call for as long as we remember. We are convinced that convergence of the rates brings stability as this was achieved at the beginning of the auction when a large part of the economy was indifferent to holding Zimbabwe dollar.

“Efficient price discovery must be allowed and an efficient market established, as without doing this the authorities will be chasing symptoms which continue to mutate as long as the arbitrage windows remain open. Getting the price of foreign currency right is a fundamental matter of Zimbabwe’s economic development interest,” said Matsheza.

Weighing in on the issue of price discovery, CZI chairman for economics committee, Jimmy Psillos, noted the need for the RBZ to calibrate the auction system to efficiently discharge its objective so as to instill confidence to the industry it serves and the population at large.

Psillos noted that the disbursement of auction funds later than the stipulated time was creating exchange losses as the rate did not remain static.

“We need to have proper price discovery, it has been said over and over again, proper willing buyer willing seller. As we speak, yesterday (Tuesday) willing buyers and willing sellers were advised of the amount they should be willing to buy and sell at.

“In terms of the auction there is a need for confidence, think about what happens to confidence if we do not disburse the money within 14 days – backlog is the other thing, it creates exchange loss because we are talking of backlog as far as last year when the exchange rate was below $100. So the central bank will be fulfilling last year’s obligation at a depreciated rate, how is that gap going to be funded,” argued Psillos.

He said the Government should consider regulating payments made to major country projects as it was somehow contributing to the exchange rate spike.

He pointed out that individuals and companies were holding on to huge amounts of US dollars as hedging and meant lack of confidence.

“There have enough US dollars to keep the business operating, that’s the truth. It is just that people rather park their US dollars somewhere and borrow Zimbabwe dollars to keep operating than use their US dollars to transact. This is a vicious cycle we would want to break.

“These large RTGS payments through government contracts is a big problem because we know that as soon as they get their money, they would want to preserve value. You pay a contractor local dollars and how are they going to preserve their value.

“These payments have to be carefully calibrated because you know that if you pay a certain amount to the market it will react and react negatively,” he added.

Archie Dongo, a member of the CZI economics roundtable, said 2022 had started on a negative note characterised by disposable income contraction due to sustained inflation that has led to pricing challenges.

Dongo highlighted that the manufacturing sector was financing the 60 percent foreign currency deficit through sales in foreign currency.

“As we saw, manufacturers are raising forex through US dollar sales to cover about 60 percent of the deficit identified by the survey. When you see products being sold only for US dollars you need to go back through the chain and sort it out. We are only seeing the results of what has been happening throughout the chain.

“With spontaneous dollarisation along the chain manifesting itself on formal shop shelves, this is threatening the relationship between formal retail and manufacturers as it creates a preference for informal channels on the part of manufacturers,” said Dongo.

“Continued existence of arbitrage opportunities arising from foreign exchange management regime is causing damage and disruption of our orderly distribution channel due to informalisation,” he said.

With regards to currency manipulation, CZI council member and Dairibord Holdings Limited chief executive, Anthony Mandiwanza, implored the government to face the delinquents head-on to nip the recurring arbitrage issues in the bud.

“If there are offenders in the system it does not matter whether they are from business or from the streets, the government’s role is to deal with those offenders, and business will always stand on the side of the law. We cannot try to deal with an issue by hiding the very offenders.

“If they are taking money from the auction going to burn it at the Zimbabwe Stock Exchange, deal with them because they are known, the RBZ has the capacity to track each individual offender. The bank’s know your customer knows who is doing what, deal with them do not punish all of us,” said Mandiwanza.

According to business representatives, the first quarter of 2022 started characterised by challenges which included high costs of inputs due to surging inflation that was growing the business’s inability to have pricing to replace stocks.

The business also lamented diminished export competitiveness attributable to heavy taxing on exporters as well as detrimental parallel market premium on surrender requirements.

They also decried policy that subsidies imported industrial goods which were competing unfairly for supermarket space with locally manufactured goods and holding the potential to accelerate deindustrialisation.

Players wanted the positive momentum gained in 2021 is maintained.

Capacity Utilisation

Zimbabwe manufacturing sector’s capacity utilisation for 2021 grew to 56, 52 percent from 47 percent in 2020 spurred by notable investments by companies.

The 56, 25 percent growth in manufacturing sector capacity utilisation is the highest in 10 years after a 57, 2 percent growth in 2011 owing to efforts being directed towards making the country a production hub again.

In 2020 capacity utilisation stood at 47 percent from 36, 4 percent in 2019.

According to the survey $147 million (mainly sourced from the Reserve Bank of Zimbabwe’s forex auction) was the total amount of investment made by local companies in the year as they sought to increase capacity while additional capacity of 25, 6 percent was created in the year.

At least 37, 8 percent of the manufacturing sector engaged in capital expenditure to increase their production capacity in 2021.

About 56 percent of the surveyed firms registered growth in output while 26 percent saw a decrease in the year.

At least 18 percent remained flat as their output neither increased nor declined.

The drinks and tobacco segment had the foremost growth in output at 82 percent, followed by the wood and furniture sector.

Other notable growth was seen in the chemicals and petroleum segment, which recorded a 64 percent growth followed by the clothing and footwear whose output grew by 60 percent.

“The total amount of investment that was carried out in 2021 to increase capacity by surveyed firms amounted to $147 million.

“According to the survey 37, 8 percent of the manufacturing sector undertook investments to increase their production capacity in 2021,”

According to the survey 37, 8 percent of the manufacturing sector undertook investments to increase their production capacity in 2021,” said Confederation of Zimbabwe Industries Chief economist Dr Cornelius Dube.

The paper printing and publishing sector had the highest additional capacity at 50, 6 percent followed by the chemicals and petroleum products segment at 30 percent.

Notable efforts towards adding capacity were made in the non–metallic mineral products and the drinks – tobacco segments which recorded 29 percent and 28 percent growth respectively.

However, according to the CZI survey inclusion of small-scale players weighed down capacity utilisation.
The reported noted that at least 19,19 percent new jobs were created in the year against 16 percent that was retrenched.

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