Imports ban boost Zimbabwe industry capacity utilisation

CAPACITY utilisation in the manufacturing sector has risen by 13,1 percentage points to 47,4 percent, buoyed by an import ban imposed to protect the beleaguered industrial sector, a Confederation of Zimbabwe Industries (CZI) Manufacturing Sector Survey for 2016 has revealed.

Capacity utilisation was at 34,3 percent in 2015.

The survey unveiled by CZI in the capital yesterday, showed that the rise in weighted capacity utilisation was largely due to an increase in production by companies whose products were placed under Statutory Instrument SI 64 of 2016.

It observed that foodstuffs, drinks, tobacco and beverages, wood and furniture, as well as paper, printing and packaging, helped to drive the country's manufacturing sector.

"The gains of Statutory Instrument 64 (SI 64) of 2016 are beginning to be realised (as) capacity utilisation has jumped significantly by 13,1 percentage points from 34,3 percent in 2015 to 47,4 percent in 2016," said CZI.

The survey, now a key barometer of the state of the country's manufacturing industry, polled 250 chief executive officers and directors from industry.

"This is a very positive development largely resulting from the moves on the part of government to protect local industry and the import priority list. Fifty four respondents recorded capacity below 50 percent, while seven percent of the respondents recorded capacity utilisation of 100 percent," the survey noted.

The priority list gives guidelines to banks on how they should allocate the scarce foreign currency.

It was drawn by the central bank this year after the country lurched into a cash crunch characterised by the depletion of nostro accounts, used by banks to settle foreign obligations and payment of imports.

The most performing sub-sector, wood and furniture products, was operating at 57,8 percent of its combined installed capacity, followed by non-metallic mineral products at 57,5 percent and foodstuffs at 56,5 percent.

Drinks, tobacco and beverages sub-sectors were operating at 52,4 percent.

The worst performing sub-sector, the metal and metal products, was operating at 37,5 percent of its combined installed capacity.

Although there have been improvements, the survey conducted annually by the country's largest industrial lobby group has noted that the manufacturing sector was still in a precarious position and that a number of concerns needed to be addressed.

The concerns include low demand for domestic products, the liquidity crisis, policy inconsistencies, a deteriorating power generation, a weak banking sector, a fall in foreign direct investment, antiquated machinery, capital constraints, corruption and competition from imports, especially from South Africa, as well as China which are dumping inferior products into Zimbabwe.

"In order for the gains not to be reversed, the underlying challenges should be addressed," CZI said.

The report indicated that 20,7 percent of respondents viewed SI 64 as positive.

"The mutual understanding is that SI 64 is not in perpetuity, but a temporary measure aimed at nurturing and incubating the manufacturing sector to allow it to reach competitiveness in the wake of weakening regional currencies and an apparent technological lag in the manufacturing sector.

"Common constraints that respondents stated as inhibiting capacity are premised around low demand for domestic products, liquidity crisis, and competition from imports, domestic competition and capital constraints.

"In 2016, 21,7 percent of all respondents reported low demand for domestic products as the major inhibitor to capacity, followed by liquidity related issues. Respondents who reported low demand said capacity utilisation has declined from 28 percent in the previous survey."

Respondents also indicated a generally low level of retooling by companies in Zimbabwe, the survey said.

"The Midlands region is lagging in terms of retooling as evidenced by 70 percent of respondents with equipment older than 20 years. This is followed by Bulawayo with 50 percent of respondents indicating that their equipment is older than 20 years.

"In light of power cuts, respondents were asked to state their source of back up energy. The results point to the need to consider green energy as the use of solar among industrialists is very minimal. Twenty five percent of respondents indicated that they have no back up energy source. This has a direct impact on production given the level of power outages."

The report said the banking sector has not been supporting the manufacturing sector.

"Close to 14 percent indicated that banks provide a wide variety of financial services. More than 50 percent of the respondents indicated that it is not easy to access funding or loans from the local banks, while another 44 percent indicated that the financial sector is unresponsive to industry needs."

A number of industrialists were concerned by the uncertain macroeconomic environment. The survey said about 77,1 percent of respondents rated policy instability as negative to very negative for the economy.

CZI has called on government and the private sector to accelerate the already existing initiatives for broad- based macro-economic stabilisation.

These, the report said, include the elimination of the budget deficit via cash budgeting and supporting measures; continued growth in local manufacturing via import substitution and alleviation of constraints on productivity.

The report said government should also adopt the South African rand as the reference currency within the multi-currency system to ensure sustained competitiveness.

Zimbabwe's economy continues to operate under pressure, resulting in low confidence, which is hurting investments.

"The Zimbabwe economy continues to operate under pressure. Confidence remains low amongst both business and consumers. Among other things, we are seeing delays in foreign payments, cash shortages, a significant imbalance between the Real Time Gross Settlement  account and the underlying dollars backing the account and people trying to withdraw every last dollar they have from banks. The postponed introduction of bond notes has worsened the situation in that the uncertainty has increased levels of cash withdrawals from the banking system," the survey reads in part.

CZI warned that the current trajectory, "if not arrested and changed, will lead to a significant economic recession".

The worsening liquidity crisis has also seen the cash-strapped government battling to raise monthly salaries for its workers.

"Government wage bill continues to constitute a disproportionate share of total resources, implying the need to strike a balance on the demand of the economy with a combination of rationalisation, as well as enhancing the supply side measures in order to grow the economy. The current scenario has a crowding out effect and has led to shelving and postponing implementation of a number of projects and programmes," said CZI.

Most respondents felt that the economic conditions are poor or deteriorating and are not conducive for business growth and development.

Most producers continue highlighting the challenge of informal imports. Despite import restrictions, some of the restricted products have started flooding the informal market.

Fifty seven percent of the respondents are pessimistic of the future as they indicated that the economy will be in recession.

The country has been hit by the closure of companies in the manufacturing sector, throwing thousands of workers on the streets. The few that are still in production, the survey indicated, have changed working hours due to a drop in aggregate demand.

"Twenty six percent of the respondents indicated that they changed their working hours. Of the respondents that had indicated having changed working hours, seven percent increased their working hours to cater for increased production. Seventy four percent cited that the changes were due to a drop in aggregate demand, which necessitated reduction in output hence the change.

"Twenty two percent of the respondents cited changing working hours directly to reduce labour costs to enhance viability and also due to inability to pay.

"In terms of retrenchment, 24 percent retrenched permanent employees while 76 percent did not retrench. Of the companies that retrenched, 54 percent highlighted declining business, 31 percent indicated cost cutting, while 13 percent indicated restructuring."