Business frets over wobbling economy

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BUSINESS confidence is slumping as inflation and operational costs continue to rise, piling pressure on increasingly apprehensive commerce and industry.

Speaking to The Financial Gazette this week, worried business leaders said many companies were stretched, with input costs rising even in US dollar terms and margins declining by the day.

The chief executive of the Zimbabwe National Chamber of Commerce (ZNCC), Christopher Mugaga, said business expected the inflation outlook for the rest of 2022 to remain grim.

“Inflation remains anathema to growth, and for Zimbabwe the historical experiences of inflation are quite difficult to stomach for industry. Inflation leads to the decimation of balance sheets and savings.

“Inflation has also created adverse expectations, where businesses sometimes end up somehow pricing for the future to cushion themselves. This is because tomorrow is not clear.

“That is contributing to the spiralling of prices, which is not guided by fundamentals, but expectations,” Mugaga said.
“It is quite unfortunate that we are experiencing both producer price and consumer price inflation. Our consumer price index and producer price index are very unhealthy.

“This has affected industry in many ways. Once inflation expectations remain adverse, then the urge to push up prices remains high and, unfortunately, it is the consumer who carries the burden at the end of the day.
“What also makes things ugly is the fact that when you look at real GDP growth, this has not been growing significantly, while aggregate bank deposits have been going up.

“What it means technically is that we had a case of creating unnecessary liquidity or unproductive liquidity, which has contributed to the surge in the inflation rate,” Mugaga added.

He also said it was important for Zimbabweans to discard the thinking that the exchange rate was the sole determinant of inflation in the country.
“We have seen inflation driven by global factors, oil and food prices, wages, inflation expectations, output gaps and productivity. “All these have a significant influence on inflation even as it seems our target in Zimbabwe has always been the exchange rate.
“This possibly is the reason why we see the over-emphasis on reserve money or targeting reserve money as a way of controlling inflation,” Mugaga noted further.
Going forward, he expected rising wage demands to further push up inflationary pressures.
On his part, the president of the Confederation of Zimbabwe Industries (CZI), Kurai Matsheza, also said rising inflation was piling pressure on business.
“We have witnessed an upsurge in utilities, prices of raw materials and critical consumables in the first quarter of the year.
“What’s worse is that even prices in US$ are increasing. This is stretching business and our margins are declining daily.
“We have noticed that we are also importing a lot of global inflation into the local economy. The issue is worsened by the instability currently obtaining in the country.
“The exchange control instability, among other problems in the country, have worsened the situation for business,” Matsheza said.
Economist Lloyd Mlotshwa said the current rate of inflation would put pressure on consumer demand as the rate of price increases outpaced the rate at which salaries could be adjusted.
“My view is that the real pressure will emerge in the second half of the year, with a higher real replacement cost of goods.
“I expect inflationary headwinds to carry on throughout the year. We are importing global inflation given our wide usage of the US dollar, and remain a net importer of goods.,

“This year’s import bill will be elevated by the likely need to import grain, which implies higher demand for US dollars as we enter the second half of the year,” Mlotshwa said.
This comes after the Reserve Bank of Zimbabwe’s monetary policy committee recently expressed concern at the escalation in annual inflation, while noting that global inflation was on the increase as a consequence of the ongoing Russia-Ukraine conflict.
“Rising prices of oil, gas, fertilisers and other related products had the effect of increasing global inflation and this inevitably had a negative impact on domestic costs of production and was destabilising the foreign exchange market,” RBZ governor John Mangudya said.
In response to the inflationary pressures, the central bank increased its policy rate from 60 percent to 80 percent, while also reviewing upwards the medium-term bank accommodation facility interest rates from 40 percent to 50 percent per annum.
In its latest quarterly Investment Notes, Imara Asset Management said protection against rising inflation would be crucial this year.
“Here we are in 2022 and not only do we have ZWL inflation, but we also have US$ inflation now running at seven percent and rising — the highest in 40 years.
“We have been concerned for nearly a year about imported US$ inflation. These concerns had their foundation in the excessive growth in the US$ money supply that has grown by over 40 percent since the start of the Covid-19 pandemic when global central banks … injected liquidity into the financial system.

“Even now broad money in the US is growing at 12 percent per annum. Monetary economists had, therefore, and rightly, been predicting inflation at seven to nine percent until 2024, based on the growth in broad money.
“Yet these forecasts were made before the Russian invasion of Ukraine. Since that time at the end of February, oil prices rose from around $80 per barrel to a recent high of $130,” read part of Imara’s investment note.
In a recent paper, the CZI also said a lasting solution to a stable exchange rate was now long overdue for a stable inflationary environment.
“A gradual approach is needed to achieve an effective and efficient exchange rate market, as it is not a one size fits all.

“CZI proposes a true liberalisation of the foreign exchange market where banks act as match-makers linking buyers and sellers of foreign currency.
“The benefits of a true liberalisation of foreign exchange is that the central bank will concentrate on managing inflation, bring banking sector stability, and building reserves from retained foreign currency earnings.
“This is largely the role of the central bank in most developed or developing nations.
“It curbs the need for the central bank to borrow externally to support the auction system. Zimbabwe’s foreign debt levels are already too high and unsustainable,” CZI said.
Speaking at a well-subscribed Daily News business meeting in Harare last week, Finance minister Mthuli Ncube said the government was trying to fix the root causes of the country’s economic problems, including inflation and currency volatility.
He said among the measures that authorities had introduced included containing fuel prices and availing more foreign currency to companies through the RBZ.

“We have noted that the recent uptick in prices for goods and services is not an issue of currency instability or anything internal.
“The global economy is under pressure. It is in turmoil. We have a challenge of rising global inflation and we are importing that inflation.
“Those of you that are importing raw materials will tell you that the prices of raw materials have been going up since last year,” Ncube said.
“We are importing inflation and that’s a tough spot for any economy to be in. That’s what we are currently experiencing,” he added.
Ncube also said the government had decided to reduce excise duty on fuel by four cents — from 12,7 cents per litre down to 8,7 cents — in response to recent sharp increases in global fuel prices.
“The increases could have been higher, but we have been containing and curtailing it by reducing the excise duty. Last week, we took another step.
“Rather than using domestic taxes to control the prices of fuel, we decided to sell 30 million litres from our strategic reserves. This we did to cushion business and the ordinary person,” Ncube said further.
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