CHALLENGES FACING ZIMBABWEAN COMPANIES

DESK REVIEW REPORT ON THE CHALLENGES FACING ZIMBABWEAN COMPANIES

1. INTRODUCTION

There was a decline in industrial capacity utilisation owing to various challenges within the economy with the turn of the century. The trend was further exacerbated by the hyper inflationary era experienced during the 2007 – 8 period. Stability in the economy was restored with the adoption of the multicurrency system in 2009 which saw an upsurge in industrial performance as well as economic growth. According to the Confederation of Zimbabwean Industries (CZI) surveys, industrial capacity utilisation declined sharply from 35.8 per cent in 2005 to below 10 per cent by 2008, before improving to 34.3 per cent in 2015. 

Despite perceived macroeconomic stability in the economy, companies are still faced with many challenges which range from structural to natural. These challenges have seen the reduction in capacity utilisation and competitiveness, retrenchment of workers, company closures, widening of the trade deficit, ballooning of the informal sector among other things.

As part of the initiatives to internalise the situation, the Tripartite Negotiating Forum Meeting held on the 18th of May 2015 mandated the Ministry of Public Service, Labour and Social Welfare in conjunction with the Ministry of Industry and Commerce to carry out a desk review on the challenges facing Zimbabwean Companies. The Desk Review report was to be submitted for consideration to the TNF Technical Committee. 

The main objective of this report is to make an analysis of the challenges being faced by Zimbabwean companies with the aim of proffering possible, sustainable policy recommendations to ensure competitiveness of local industry. 

This report benefited from insights drawn from Government, Employment Councils, Labour and Employers’ Organisations. The report on Costs Driver Analysis of the Zimbabwean Economy produced by ZEPARU was also utilised in compiling this report. Most challenges bedevilling companies were seen to be cross cutting to most sectors and these include, inter alia, erratic power supply, high cost of labour, inaccessibility of loans, dilapidated infrastructure and unfair competition from foreign products.  

This report however acknowledges the crucial steps which the Government has embarked on so far in trying to alleviate these challenges though much still needs to be done. The amendment of the Labour Act, banking sector reforms, launching of the Zimbabwe Competitiveness Commission, protectionism policies and Ease-of –Doing Business reforms under the Rapid Results Approach (RRA) among other things, are examples of strides towards improving competitiveness. 

The private sector has also been instrumental in ensuring an enabling environment for economic growth. This is evidenced by their overwhelming support for the buy Zimbabwe initiative, various public private partnerships as well as compliance to various Government regulations.

2. CHALLENGES

Notwithstanding the current cash crisis which has resulted in a plethora of challenges for the local companies, stakeholders pointed out the major challenges hindering growth in most local companies, threatening their survival. A call for urgent ameliorating measures was also emphasized in order to avoid a further reduction in capacity utilization and company closures. The challenges are given below:

• High Cost of Labour 

In comparison to regional countries, Zimbabwe is said to have the highest minimum wages apart from South Africa. Companies argue that the wage bill is unsustainably too high given the little profits by companies and the prevailing economic conditions. They further advocate for productivity related wages as opposed to sector level wage setting which are benchmarked by the Poverty Datum Line (PDL).

Companies are facing high retrenchment costs particularly in cases of redundancy. Due to the low production levels and acquisition of new advanced technology, companies are finding it difficult to trim off excess labour due to the restrictive legislative provisions. Despite the new Labour Amendment Act No. 5 of 2015, the labour market regulations still remain rigid and prohibitive which leaves businesses ‘trapped’ with excess labour.  

• Unfair Competition from Imports

Locally produced products are usually less competitive on the market relative to imported goods and services both in terms of price and quality. Owing to high costs of production, local industries tend to charge higher prices than imports in order to remain profitable. Obsolete equipment in local industries is also resulting in relatively poor quality goods being produced. Stakeholders also indicated that foreign companies in some instances are awarded tenders at the expense of local contractors.

The situation is further worsened by the depreciation of the currencies of the regional trading partners especially the South African Rand against the United States Dollar. Imports will tend to be even cheaper and hence dearer at the expense of local products. Some companies would be compelled to drastically reduce prices to the detriment of their businesses. 

• Erratic Power Supply and High Cost of Utilities

Companies have not been spared by the serious power shortages currently being experienced in the country. These power shortages are as a result of various challenges which the sector is facing such as low water levels at Lake Kariba and obsolete equipment.  In some companies, employees work for very few days due to this trend and the employers will have to pay for idle time. Alternative power sources like generators and fossil fuels are proving to be very much costly. 

The electricity power high tariff system has also impacted negatively on production. The electricity tariff for ferrochrome producers in Zimbabwe for example, currently stands at $7.10 per kilowatt, which on comparative basis is higher than the other countries in Southern Africa. 

• Lack of working Capital

Stakeholders submitted that lack of working capital has hampered production in most companies. This is as a result of the financial liquidity crunch and unavailability of cheap long term loans from banks. With little money in circulation and little production going on, most companies are now relying on continued short term borrowing which attracts high interest rates to fund their production activities and wages. 

This is highly unsustainable and is resulting in retarded growth for business. In this regard companies are failing to retool to an extent that most companies are still using equipment from as far back as the 1980s.

• National Policy Inconsistency

National Policy Inconsistency is also a hindering factor towards sustainable investment growth as foreign investors remain with uncertainty and reduced confidence over the legislative frameworks. Labour laws, trade protectionism policies and the Indigenization policy were among the issues cited as ‘grey areas’ which induce the potential investors to maintain a wait and see attitude. 

• High Taxes and Tariffs

According to the stakeholders consulted, businesses in Zimbabwe are being faced with a lot of statutory taxes and levies which include NSSA, NEC dues, Zimdef, AIDS levy and Standard Associations levies to mention a few. The levies and taxes do not take into cognizant the different types of sectors and levels of production for example the mining sector compared to the tourism sector which is seasonal. Some of these levies charged by parastatals were seen as unjustified and unrelated to services offered by the companies. An example would be the City Council Health Certificate required from every business while the same businesses have to meet EMA requirements for environmental health at a high cost.

The high tax rates by ZIMRA have also increased the burden that business has to shoulder. This includes duty being charged on importing raw materials. Although business is mindful of the need to support government’s fiscals towards economic and social responsibility, the challenge is the high rates that a company has to pay. This situation is threatening the survival of companies, to a greater extent.

Importing and exporting in Zimbabwe are largely characterised by red tape, excessive and opaque processes, overregulation, frequent solicitation of informal payments, and importantly, multiple physical inspections which are negatively impacting the costs of trading.  Previous studies reported that practically all imports and exports including agricultural commodities and medicines are subject to multiple licensing sometimes from different departments in the same ministry. 

• Poor State of Road and Rail Infrastructure

The Employment Councils indicated that the poor state of the roads and rail infrastructure posed a serious challenge to competitiveness as they increase the cost of production. In addition, excessive roadblocks, tolls and police fines (regarded by stakeholders to be more of revenue raising activity) are contributing to higher transportation costs. Though rail is the cheapest mode of transport, irregular timetables and common delays attached to it makes it less favourable.

• Shrinking Market  for Products

The product demand within the country has consistently been shrinking largely due to the low disposable income levels and the liquidity crunch currently prevailing. With the advent of the infamous July 17 Labour Court judgement which saw thousands of workers’ contracts being terminated on 3 months’ notice, the situation was even worsened due to an escalation in unemployment. Reduced capacity utilisation by downstream industries has also been a major setback on the companies supplying raw materials.

• Delay by Government to Pay for Goods and Services

These delays are reportedly crippling many sectors of economy. The fertilizer industry, pharmaceutical, construction and other service providers have been affected by long delays which have brought some companies to a comatose state.

3. OTHER CHALLENGES SPECIFIC PER SECTOR

Cotton Ginning Industry

• Side-marketing is a big challenge to the viability of the cotton industry.

• The continuous harsh weather conditions vis a vis climate change have caused a crop decline in the cotton industry, which has led to underutilisation of ginning capacity.

Medical and Allied

• Impasse between healthcare funders and healthcare providers resulting in none or late payment for services rendered.

Engineering, Iron and Steel

• The non-operationalisation of Ziscosteel and its subsidiaries has affected the Engineering industry as it has increased the cost of production as companies within this sector are forced to import expensive raw materials.

Grain Marketing Board

• The procurement price for maize is $390\tonne, which is way above the market price. The selling price is also then pegged at a price that is above the market price. Hence both the maize and mealie meal prices are expensive.

4. RECOMMENDATIONS

(i) Continuous Reforms of Zimbabwe’s Labour Laws

The desk review study reviewed the need for continuous labour law reforms so as to provide for flexible work practices to balance the need to create and sustain jobs and retrenchment at reasonable cost when a company is no longer financially viable. 

The setting of wages in Zimbabwe should be based on productivity indexes instead of the Poverty Datum Line (PDL) hence the need to expedite the establishment of the Zimbabwe National Productivity Institute (ZNPI) to cater for productivity based wages. Companies also suggest that at least the food poverty line can be a better proxy in the absence of productivity indexes since the PDL is too high.  

(ii) Favourable Protectionism Policies 

Government should ensure that local industries are cushioned from the severe effects of stiff competition from imported products. This may include embargos as well as hiking tariffs on foreign goods which can be produced locally. These measures need however to be taken with caution since they may be counterproductive especially if the local supply is not able to meet the demand for the product.

Stakeholders highlighted the need to review the taxes and import duty particularly on raw materials. A critical dimension of competitiveness is the ability of businesses to access imported inputs easily and at competitive prices.

Multiple import permits and the cumbersome processes are delaying trade unnecessarily. In addition to lowering trade taxes, the stringent and multiple procedures to access permits must be reviewed.

(iii) Increase awareness on the Buy Zimbabwe campaign.

Stakeholders emphasized on the need for continued awareness raising and advertising of local products as compared to imported goods. Consumers should see the value of buying local goods.

(iv) Availability and Accessibility of Cheap Long Term Loans.

The need for available and accessible cheap long term loans cannot be over emphasised. This includes loans with reasonable interest rates and the review of prohibitive requirements by the banks. Businesses would be able to update their equipment thus allowing them a competitive edge on the international front.

(v) The Use of Alternative Power Supply

Business indicated the need to think of alternative cheaper and available sources of energy like solar and hydro energy. The problems currently affecting ZESA also need to be fixed.

(vi) Reduced Taxes on Companies

As alluded to earlier on, taxes has become too heavy a burden for the companies. It was suggested that Government through the parastatals should consider a downward review of taxes as well as avoidance of duplication of roles. This is also in line with the Ease-of-Doing Business programme under the auspices of the Rapid Results Approach. Furthermore, ZIMRA and NSSA should come with payment plans to industry to allow companies to survive and monitoring mechanisms be put in place so as to avoid abuse.

(vii) Infrastructure Development

Revival of the National Railways of Zimbabwe is critical for industries as it will help reduce on transport costs. The same goes without saying for the road network in Zimbabwe which is now characterised by potholes and unnecessary inconveniences.  Government should see to it that the rate of infrastructure development is expedited especially through public private partnerships. This is also crucial in attracting foreign direct investment into the country.

5. CONCLUSION

There is plenty of evidence that Zimbabwean industry has developed a competitiveness gap due to the many challenges being faced. One of the realities highlighted by stakeholders is the need for policy shift by Government as the significant part of the challenges is policy inflicted. The Government should intensify its efforts to attract foreign direct investment as well as create a level playing field for both the employers and workers vis a vis industrial development and harmony. One other sobering reality is that for the current status of companies to improve, the economy needs to adjust to the realities of dollarization and the need for an “internal devaluation” that supposes a downward adjustment in the costs of business transactions and their production processes.