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Inflationary pressures choke industry

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A rising bout of inflation is posing a severe threat to Zimbabwe’s industries amid growing fears most companies will  struggle to restock, which could potentially trigger a significant reduction in production and low capacity utilisation.

Business leaders and economists have warned the severity of soaring inflation was disrupting business planning, saying that things were going from bad to horrid. The tremendous volatility is also pushing labour costs.

Zimbabwe’s annual inflation  raced to 131.7% in May, from 94.6% in April as the local currency continues to weaken rapidly against  all major currencies. 

The Confederation of Zimbabwe Industries president, Kurai Matsheza, told Business Times that the soaring inflation will reduce the production capacity of industries.

Matsheza said  it will also cause labour unrest which will have a negative impact on capacity utilisation.

“The inflationary pressures are certainly not good for the Zimbabwe economy. As an industry this is a situation which we have always been fearful of. Production capacity is going to be decimated as firms fail to restock. Labour demands are going to be high fuelling further inflation and this will make labour restless. As labour unrest sets in, capacity utilisation declines further,” Matsheza said.

He said the government should deal with known factors causing inflation.

“Inflation is coming on the back of a number of factors. Imported inflation is one such factor which Zimbabwe has a limited arsenal to deal with. The other factor is caused by the galloping exchange rate both on the auction and parallel market. Factors that cause the exchange rate to run away need to be identified and dealt with. Failure to operate a true Dutch auction system is one such problem which then builds into failure to settle bids allotted and hence creating an unsustainable backlog which will be settled later at a higher cost to the Reserve Bank,” Matsheza  said.

Last year, the local industry capacity utilisation rose to 56.25% — the highest level since 2012 — but the gains are set to be undone by inflationary pressures.

A few weeks ago the government introduced a raft of measures in a desperate bid to tame the soaring inflation among them suspending bank lending to stop the routing of the Zimbabwean dollar on the parallel market.

However, the local  currency  has continued to weaken against the major currencies, especially the greenback.

This week, the Zimbabwe dollar was trading at ZWL$500:US$1  on the parallel market. At the auction system, the local currency was trading at ZWL$308:US$1 and ZWL$304:US$1 at the interbank. 

 Matsheza said the reality on the ground seems to indicate that broad money supply has been growing despite authorities insisting that they have tightened money supply.

“Sources of that growth need to be identified and plugged. Agriculture financing(pre-planting and post harvesting) needs to be done through banks. Another point that may be pushing exchange rates are the infrastructure projects that are financed from budget instead of long term finance,” Matsheza said.

The Zimbabwe National Roads Administration has already disbursed ZWL$17bn to a number of local governments. 

Recently, Finance minister Mthuli Ncube announced that the government is now paying contractors for major infrastructure projects half in US dollar and the remainder in local currency. 

The president of the Zimbabwe National Chamber of Commerce, Tinashe Manzungu,  said the soaring inflation is negatively affecting business operations.

“Since inflation is not linear it ripples through the economy differently and affects businesses differently but the denominator is that it disrupts business planning and leads to lower investment,” Manzungu said, adding that rising inflation is associated with high interest rates  and this reduces economic growth.

“We have recently seen that even our economic growth projection of around 7% has been reviewed downwards. It has an effect on the foreign  exchange especially on imports because we now pay more for imports which is a double whammy to economic players.”

He said the relationship between inflation and employment is convoluted as businesses are unlikely to hire and likely to increase “our unemployment levels”.

An economist with the University of Zimbabwe Moses Chundu told Business Times that there will be reduced production and high unemployment due to the local high inflationary environment.

“Reduced aggregate demand is not a good thing for the economy in general because less production means more unemployment. It also means less government revenue hence trapping the economy in a vicious cycle leading to underdevelopment and deepening poverty,” Chundu said.

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