Waning aggregrate demand takes toll on business




Spread the love

HARARE – Zimbabwe’s business is worried over continued waning aggregate demand in line with inflation and exchange rate developments that will negatively impact volume and overall performance in the short term.

The first half of the year 2022, was largely characterised by sudden policy changes in response to economic conditions.

The measures included the suspension of lending by banks, to private sector, public sector and individuals with immediate effect and the increase in capital gains tax to 40 percent on ZSE shares held for less than 270 days and 20 percent for shares held more than 270 days.

Experts who spoke to the Business Weekly said a stable operating environment, characterised by policy consistency, will positively contribute to business’ performance.

“We anticipate aggregate demand to rerate downwards, in line with inflation and exchange rate developments,” Chiedza Chonzi, a research analyst at FBC Securities said.

She noted that the first half of the year was largely characterised by sudden policy changes in response to economic conditions, which in turn compounded the already fragile operating environment.

According to the Zimbabwe National Statistics Agency (Zimstat), Zimbabwe’s inflation rate jumped back into triple digits in May after the central bank effectively devalued the local currency by introducing a new interbank rate.

Annual inflation quickened to 131.7 percent from 96.4 percent in April, ending a 10-month period in which the rate was below 100 percent. Costs rose 21 percent in the month, the fastest pace since July 2020. Food prices increased more than 150 percent from a year earlier.

Victor Bhoroma, another economist said in the short term, aggregate demand will definitely decline due to increase in inflation and drop in consumer disposable income.

“In the medium term, the market is headed for a complete redollarisation regardless of government interventions,” he said.

Bhoroma said for the Government to facilitate an improved operating environment for business, it should put a total freeze on money supply, using long term financing instruments to fund infrastructure projects such as Bonds, implementing a managed floating exchange rate, transparency and genuine reform on central bank monetary policy.

“Government should also ensure elections are held in a free and fair election environment, institute tax reforms and a debt repayment plan,” he said.

Buy Zimbabwe general manager, Alois Burutsa, said the issue of rising inflation is an issue affecting Zimbabwean companies and inflation is being driven primarily by exchange rate movements.

“Prices in Zimbabwe are indexed to USD so when the rate moves, prices also move. As Buy Zimbabwe, we strongly urge our monetary and fiscal authorities to rein in inflation through containing the exchange rate.

“But on the other hand it is not about the rate, it is about stability, if there is no stability, this is going to impact on aggregate demand and companies will start suffering,” he said.

He noted that if the rate continues to increase as it is happening now, people will start thinking of going to import goods into the country, which will ultimately erode the competitiveness of local production.

Clothing retailer, Truworths Limited, in its recent financials, said the regulatory environment and the deteriorating economic environment will continue to be a hindrance to normal trading and the “Managed exchange rate” for local US dollar sales will have a negative impact on financial performance.

“The resurgence of inflationary pressures necessitates that the business reduces its exposure on Credit sales and focuses on Cash sales.

“The lag in consumer income growth relative to increased inflationary pressures will reduce consumer disposable income. The Business will focus on improving cash sales and productively controlling costs,” said the company.

Packaging company Nampak Zimbabwe said the difficulties remain ahead with the disparity between the official and market based exchange rates, giving rise now to spiralling inflation which in turn increases costs and wage pressures.

It said the shortage of raw materials and continuing difficulties in accessing sufficient foreign exchange are on-going challenges which will not go away in the foreseeable future.

“Businesses are resilient, but the continued economic headwinds continue to hamper operations,” it said.

Dairibord Holdings on its part said although the authorities are projecting a positive economic outlook in 2022, the poor start to the 2021/2022 summer agricultural season, erosion of consumer disposable incomes due to escalating inflation and exchange rate disparities heighten the risk of a slowdown in growth compared to 2021.

The group also noted that the geopolitical effects resulting from the Russian-Ukraine war are expected to further disrupt global supply chains, exert upward pressure on inflation and result in slowdown in economic growth.

ART Corporation concurred that the macro-economic environment remained challenging and uncertain as continued shortages of foreign currency, depreciation of the local currency and the inflationary upcycle dampened market improvements which followed the easing of Covid 19 restrictions.

Meanwhile, Food retailer, OK Zimbabwe anticipates an improvement in the product supply environment on the back of a combination of increased foreign currency collections in-store as well as renewed commitment by authorities to improve efficiencies on the RBZ auction system.

It noted that the payment of civil servants’ emoluments in foreign currency, heightened agricultural activity, and resumption of normal school calendar are expected to result in an upturn in consumer spending.

Eddie Cross, an economist, said that many companies are facing capacity constraints in meeting domestic demand or export demand as the economy is expanding rapidly.

He said domestic demand has remained high although the growth has eased slightly.

“We need to liberalise our foreign exchange market to bring about stability,” he said.

According to Chonzi, despite the uncertainties prevailing locally, the economy appears poised for positive performance owing in part to increased economic activity coming off the pandemic and relative stability as a result of government efforts, including the introduction of the auction system and maintaining a tight grip on money supply.