Auction system pays off for manufacturers

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The auction system introduced by the monetary authorities towards the end of June this year, is paying off for manufacturers as it has significantly improved access to foreign currency for the importation of critical raw materials.

Improved access to foreign currency would be expected to facilitate raw material imports for manufacturers and would naturally result in increased production and capacity utilisation.

For the last years, players in the sector have been citing limited access to foreign currency as a deterrent to high levels of production.

In its 2019 manufacturing sector survey, the Confederation of Zimbabwe Industries (CZI) cited “shortages of foreign currency and an inefficient interbank market for foreign exchange” as one of the reasons why the manufacturing sector was trapped in a low output medium.

In 2019, manufacturing sector output declined by 23 percent while capacity utilisation was low at 36,4 percent.

The highest number of respondents to the survey, accounting for 37 percent, cited foreign currency shortages as the major constraint for industry players in 2019.   

“Lack of access to forex due to an inefficient interbank market, resulted in high replacement exchange rates for the manufacturing sector, which curtails companies’ capacity to produce. High costs and shortage of raw materials were mainly affected by foreign currency shortages in the economy. Manufacturers incurred high cost of raw materials due to indexation of prices to USD as the formal sector is experiencing implied dollarisation,” reads part of the survey findings.

Shortage of foreign currency hampers the retooling process and adoption of latest technology, according to CZI.

The situation could have been worse had players not turned to the parallel market as a source of foreign currency.

However, foreign currency sourced from the parallel market would be expensive and would result in reduced raw material imports compared to the situation when foreign currency is sourced from the official auction market.

The introduction of the foreign currency auction system, however, seems to have improved the situation with a total of US$106,8 million released to the manufacturing sector for the importation of raw materials since the start of the first auction up to the end of September 2020.

In addition to providing industry with the much needed foreign currency, the auction system has resulted in the stabilisation and strengthening of the exchange rate for eight consecutive weeks. 

Currently, the exchange rate stands at $81,3499 to the greenback.

Experts say a stable currency improves the ease and cost of doing business for firms and allows them to produce and invest more.

While the statistics from the Reserve Bank of Zimbabwe do not disclose the nature or type of raw materials that were being purchased from the foreign currency acquired at the auction, an analysis by Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU), reveals a significant jump in the importation of selected raw materials between July and August 2020 against the comparable prior year.

According to ZEPARU, in its Economic Barometer Report for September 2020, import patterns for July and August 2020 show a noticeable improvement in importation of raw materials when compared with a similar period in 2019.

Using a random selection of raw materials ZEPARU revealed that there is a noticeable increase in the import values in 2020 compared to 2019. 

According to ZEPARU, a look at the specific products shows that there was a significant jump in rubber and related products, which increased by about 35 percent in 2020 compared to 2019.

“It can be confirmed that the amount of imports for these products exceed the levels recorded in 2017 and 2018 by about 27 percent. An increase of more than 20 percent in raw material importation was also noticeable for glass and plastic raw materials,” reads part of the ZEPARU report.

The research think tank said if raw materials usage can be used as a proxy for increased manufacturing sector activities, then there is a natural expectation that there will be more pronounced improvements in the manufacturing sector in 2020 compared to 2019.

“This general increase in the raw material importation underlines the importance of ensuring that there is easy access to foreign currency as a strategy towards manufacturing sector viability.

“This implies that sustainability of the auction system is key in ensuring manufacturing sector revival,” reads part of the report.

CZI has been supportive of the auction system and in a recent tweet, using its twitter handle, acknowledged that “stability is settling in and we must stay the course. Keeping our eye on the ball.

Ideas and policy options welcome. Some companies that had suspended higher purchase are beginning to bringing this back now.”

In another tweet on September 25, the Business Membership Organisation (BMO) said: “Feedback from our members applying for FX is largely positive and inefficiencies are being raised and addressed throughout the trading weeks. Now onto production!!!,” signifying how key easy access to foreign currency is to business. – Business Weekly