Opinion / Columnist
Adapt or Die: The need for Zimbabwean companies to adapt to the forex shortages
06 Jan 2018 at 07:41hrs | Views
'Companies need to source their own forex.' This was the statement by the Minister of Industry and Commerce Michael Bimha at a recent press conference in Harare recently. He is absolutely right.
Causes of Zimbabwe's economic problems during the multicurrency regime.
The economy of Zimbabwe went through a boom period following the introduction of a multicurrency system on 29 January 2009. Business confidence in the operating environment in the country remained persistently positive from one quarter to the next for three and a half years until the last quarter of 2012. At the end of 2012 revenue growth of major companies within the Zimbabwean economy started to stagnate, and in the subsequent quarters revenues declined as a result of falling demand. The causes of the slowing economy of Zimbabwe post introduction of the multicurrency system can be attributed to two main factors; namely corporate mismanagement and government policymaking.
Corporate Mismanagement
The majority of Zimbabwean companies were spectacularly mismanaged with the advent of the multicurrency system. Zimbabwe's economy stabilized with the introduction of the multicurrency system in January 2009; hyperinflation, foreign currency shortages and commodity shortages which had plagued businesses since 2000 became a thing of the past. Consumer incomes rose in real terms as both public and private sector remuneration changed to United States Dollars. However a large number of companies in Zimbabwe struggled to achieve high capacity utilization and as a result most products were imported from South Africa. Prior to the economic troubles Zimbabwe faced which began in 2000, the country had a strong manufacturing base and was self-sufficient in supplying the local market with basic goods such as foodstuffs, toiletries, clothing and footwear. The failure to restart Zimbabwe's manufacturing base upon stabilization of the economy can be directly attributed to corporate mismanagement.
The fundamental form of corporate mismanagement which faced Zimbabwean companies was a failure by management of a number of Zimbabwean companies to formulate a long-term vision and strategy for their companies. Faced with a completely different operating environment in which it was much easier to do business, management of a number of Zimbabwean manufacturing entities simply converted their entities into distributors of South African made products in order to make quick profits. This phenomenon may be attributable to two factors, firstly the mediocre quality of management which remained in Zimbabwean companies when the economy collapsed and highly skilled and experienced personnel emigrated, and secondly a culture of short-term decision making which emanated from the hyperinflationary era. Some large Zimbabwean manufacturing entities which were cornerstones of the economy's manufacturing base were suddenly led by executives who had no experience running companies competitively within a stable operating environment. These executives were mostly personnel who joined the ranks of the companies post 2000, often in middle management roles, and had rose to the top of their respective companies as experienced staff left the country as a result of deteriorating economic conditions. A psyche of short term decision making prevailed as a result of experiences during the hyperinflation era, and as a result such management had neither long term vision nor strategy to postulate the future of their companies in five to ten years' time.
As a result of management's failure to strategize for the long term, a multitude of opportunities for positioning Zimbabwean companies for sustainable growth were wasted. Quick profits made at the advent of dollarization were used to pay excessive remuneration to company executives. Loans sourced for recapitalization of manufacturing entities were used to buy luxury cars and houses for company executives and directors. Numerous cases of excessive remuneration and/or financial improprieties were reported in various private and state owned corporations. The effects of mismanagement became increasingly evident in 2013 as companies faced cash flow problems; companies failed to remunerate staff on time, failed to service loans and there were a large number of company failures leading to increased unemployment. This scenario continued right through 2014, and in July 2015 an even greater number of workers lost their jobs as a result of a precedent set by the Supreme Court of Zimbabwe which ruled that companies could lawfully terminate contracts of employees at any time without offering them packages provided employees were given at least three months' notice. The economy of Zimbabwe was set in a death spiral characterized by falling demand which led to more company failures, further unemployment and further falling demand. The number of company failures accelerated excessively in the last two quarters of 2015, possibly as a direct result of massive job losses as a result of the June 2015 Supreme Court of Zimbabwe ruling.
The death of the formal sector in Zimbabwe resulted in the emergence of a large informal economy which sourced manufactured products from outside the country, mainly from South Africa, for resale at a mark-up in Zimbabwe. The many poor in Zimbabwe ceased buying groceries at supermarkets and started buying groceries from tuckshops and street vendors who individually purchased their stock from South Africa. The tuckshops and street vendors would sell the exact same product for much less because they did not pay tax and had no overhead costs, and furthermore goods were often smuggled into the country to avoid paying customs duties and tariffs. Tuckshops and street vendors do not bank a day's earnings as formal businesses do - contrary to the belief that 'cash shortages' in Zimbabwe were caused by a few small Asian owned shops and businesses, cash shortages within the formal economy in Zimbabwe were caused by the increased informal nature of the economy.
Government Policymaking
The most beneficial policy announced by the Government of Zimbabwe for the country's economy since 2000 was the introduction of the multicurrency system in January 2009 and the abandonment of the Zimbabwe Dollar. For the first time in a decade Zimbabwe experienced real economic growth in 2009. Business and investor confidence remained high up to the end of 2012. However business and investor confidence was eroded by policy inconsistency with regard to the indigenization policy from 2013 to 2016.
The indigenization policy was introduced by the Government of Zimbabwe to empower previously disadvantaged black indigenous population of Zimbabwe by reserving at least 50% ownership of companies operating in Zimbabwe for black indigenous Zimbabweans. Although the intents of the indigenization policy to empower the majority black Zimbabweans were noble, continuously shifting positions on policy implementations created massive uncertainty within the business and investor community. There were numerous pronouncements on how the indigenization policy was to be implemented, most of which shifted within six months of their announcement; or were completely done away with when a new cabinet minister for the government ministry in charge of indigenization was appointed.
The uncertainty created by inconsistent pronouncements on how the indigenization policy was to be implemented cannot be understated. Companies operating within the country whose type of business required large capital expenditure, for example in mining or manufacturing, could not plan investments in the face of uncertainty on how the indigenization policy was to be implemented. Furthermore foreign based entities that were planning to set up operations in Zimbabwe as foreign direct investment had to halt any intended investments until there was certainty on how the indigenization policy was to be implemented. The uncertainty regarding the manner in which the indigenization policy was to be implemented not only halted new capital investments, but it led to capital flight because of the increasing country risk profile of Zimbabwe in the historic context of the chaotic indigenization of land - the Land Reform and Redistribution Programme - which was implemented by the Government of Zimbabwe from 2000. A halting of new investments and capital flight only contributed to increased unemployment and falling demand, feeding the death spiral of the formal sector and increasing the informal nature of the economy.
What needs to happen next?
Now that the new government under President E.D. Mnangagwa has provided clarity with regards to the indigenization policy, there is a need for the private sector management to carry out their responsibility to adapt to the business environment.
One of the major findings of a study I conducted at the University of Zimbabwe on the perception of the business environment in Zimbabwe between 2008 and 2014 was that business confidence in the external environment in Zimbabwe may depend on how well a company is performing rather than actual factors in the external environment. This finding highlighted a possible weakness of judgement by business leaders in Zimbabwe as business confidence in the external environment should not depend on how well a company is performing but on a fair assessment of the environment and the opportunities or threats that exist within such environment.
On the other hand the performance of a company in a relatively stable macro-economic environment such as experienced in Zimbabwe with the advent of the multicurrency system, or loosely termed 'dollarization', does not depend on the external environment itself but on adaptability to the opportunities and threats provided by the external environment - it depends on management's ability to adapt.
The external environment is a factor that is beyond the control of the business organization in any economy, whether in a liberal economy such as the United States, or in a state controlled economy such as North Korea. However, how well a business organization performs is within the control of management as it has the responsibility to make the necessary changes to adapt to the external environment to remain competitive at a local, regional and global scale.
The current forex shortages in Zimbabwe may provide an opportunity for Zimbabwean companies to adapt. The use of bond notes may actually create incentive to revive local manufacturing. Much lower real wages, electricity tariffs, municipality tariffs and government taxes payable in bond notes may result in much lower costs of production. Lower costs of production, coupled with unaffordability of imported products in the mass market, may become incentive for developing local manufacturing in the medium to long term and opportunity to export and earn the precious forex.
Zimbabwean companies need to immediately start developing local supply chains wherever possible sourcing locally produced goods and inputs. For example, it makes no sense at all to be importing vegetables and fruit juice from South Africa using forex sourced from the black market, passing the price on to consumers, and then complaining that the RBZ is not allocating forex for imports. Its simply silly.
At some point consumers will not afford to buy the overpriced products on shop shelves and it is the Zimbabwean companies operating retail and distribution businesses that will shut down. Smart management will adapt whilst current cash flows still allow them to do so in order for their businesses to continue operating into the distant future.
Meanwhile the RBZ should focus its attention on allocating forex only for power, fuel , medicines for government hospitals and clinics and industrial chemical imports and not for every need for forex that exists in the market because it is unsustainable.
The private sector as well as individuals should indeed source their own forex for whatever they seek to import or pay for overseas including vehicles, university fees and so on - the list is infinite. At the same time the RBZ must allow whoever wishes to demand payment in hard currency for their products or services to do so, and float the bond note currency in our bank accounts within a reasonable range for example 1USD:3 Zimbabwe Bond Notes and let market forces take action.
As I concluded in my paper on perception of the business environment in Zimbabwe between 2008 and 2014; input to governmental policymaking from a management which fails to adapt to the external environment is disruptive. A failure to innovate new business solutions to adapt to the prevailing external environment will instead be described as a failure of the external environment which governmental policymaking must address.
Constant adjustment of Zimbabwe government policy positions to counter continuously arising 'challenges' in the external environment such as forex shortages (we have had 'liquidity crisis' and 'high wage bill' recently) without due investigation results in poor and inconsistent policymaking which creates a continuous cycle of real and perceived instability. As the saying attributed to Thomas Jefferson goes, "That government is best which governs the least, because its people discipline themselves."
Gilbert O'Neil Mushure
Founder and Fund Manager
Asia Africa Business Research Institute
Website: www.aabri.org
Lecturer at the University of Zimbabwe, Faculty of Commerce
Causes of Zimbabwe's economic problems during the multicurrency regime.
The economy of Zimbabwe went through a boom period following the introduction of a multicurrency system on 29 January 2009. Business confidence in the operating environment in the country remained persistently positive from one quarter to the next for three and a half years until the last quarter of 2012. At the end of 2012 revenue growth of major companies within the Zimbabwean economy started to stagnate, and in the subsequent quarters revenues declined as a result of falling demand. The causes of the slowing economy of Zimbabwe post introduction of the multicurrency system can be attributed to two main factors; namely corporate mismanagement and government policymaking.
Corporate Mismanagement
The majority of Zimbabwean companies were spectacularly mismanaged with the advent of the multicurrency system. Zimbabwe's economy stabilized with the introduction of the multicurrency system in January 2009; hyperinflation, foreign currency shortages and commodity shortages which had plagued businesses since 2000 became a thing of the past. Consumer incomes rose in real terms as both public and private sector remuneration changed to United States Dollars. However a large number of companies in Zimbabwe struggled to achieve high capacity utilization and as a result most products were imported from South Africa. Prior to the economic troubles Zimbabwe faced which began in 2000, the country had a strong manufacturing base and was self-sufficient in supplying the local market with basic goods such as foodstuffs, toiletries, clothing and footwear. The failure to restart Zimbabwe's manufacturing base upon stabilization of the economy can be directly attributed to corporate mismanagement.
The fundamental form of corporate mismanagement which faced Zimbabwean companies was a failure by management of a number of Zimbabwean companies to formulate a long-term vision and strategy for their companies. Faced with a completely different operating environment in which it was much easier to do business, management of a number of Zimbabwean manufacturing entities simply converted their entities into distributors of South African made products in order to make quick profits. This phenomenon may be attributable to two factors, firstly the mediocre quality of management which remained in Zimbabwean companies when the economy collapsed and highly skilled and experienced personnel emigrated, and secondly a culture of short-term decision making which emanated from the hyperinflationary era. Some large Zimbabwean manufacturing entities which were cornerstones of the economy's manufacturing base were suddenly led by executives who had no experience running companies competitively within a stable operating environment. These executives were mostly personnel who joined the ranks of the companies post 2000, often in middle management roles, and had rose to the top of their respective companies as experienced staff left the country as a result of deteriorating economic conditions. A psyche of short term decision making prevailed as a result of experiences during the hyperinflation era, and as a result such management had neither long term vision nor strategy to postulate the future of their companies in five to ten years' time.
As a result of management's failure to strategize for the long term, a multitude of opportunities for positioning Zimbabwean companies for sustainable growth were wasted. Quick profits made at the advent of dollarization were used to pay excessive remuneration to company executives. Loans sourced for recapitalization of manufacturing entities were used to buy luxury cars and houses for company executives and directors. Numerous cases of excessive remuneration and/or financial improprieties were reported in various private and state owned corporations. The effects of mismanagement became increasingly evident in 2013 as companies faced cash flow problems; companies failed to remunerate staff on time, failed to service loans and there were a large number of company failures leading to increased unemployment. This scenario continued right through 2014, and in July 2015 an even greater number of workers lost their jobs as a result of a precedent set by the Supreme Court of Zimbabwe which ruled that companies could lawfully terminate contracts of employees at any time without offering them packages provided employees were given at least three months' notice. The economy of Zimbabwe was set in a death spiral characterized by falling demand which led to more company failures, further unemployment and further falling demand. The number of company failures accelerated excessively in the last two quarters of 2015, possibly as a direct result of massive job losses as a result of the June 2015 Supreme Court of Zimbabwe ruling.
The death of the formal sector in Zimbabwe resulted in the emergence of a large informal economy which sourced manufactured products from outside the country, mainly from South Africa, for resale at a mark-up in Zimbabwe. The many poor in Zimbabwe ceased buying groceries at supermarkets and started buying groceries from tuckshops and street vendors who individually purchased their stock from South Africa. The tuckshops and street vendors would sell the exact same product for much less because they did not pay tax and had no overhead costs, and furthermore goods were often smuggled into the country to avoid paying customs duties and tariffs. Tuckshops and street vendors do not bank a day's earnings as formal businesses do - contrary to the belief that 'cash shortages' in Zimbabwe were caused by a few small Asian owned shops and businesses, cash shortages within the formal economy in Zimbabwe were caused by the increased informal nature of the economy.
Government Policymaking
The most beneficial policy announced by the Government of Zimbabwe for the country's economy since 2000 was the introduction of the multicurrency system in January 2009 and the abandonment of the Zimbabwe Dollar. For the first time in a decade Zimbabwe experienced real economic growth in 2009. Business and investor confidence remained high up to the end of 2012. However business and investor confidence was eroded by policy inconsistency with regard to the indigenization policy from 2013 to 2016.
The indigenization policy was introduced by the Government of Zimbabwe to empower previously disadvantaged black indigenous population of Zimbabwe by reserving at least 50% ownership of companies operating in Zimbabwe for black indigenous Zimbabweans. Although the intents of the indigenization policy to empower the majority black Zimbabweans were noble, continuously shifting positions on policy implementations created massive uncertainty within the business and investor community. There were numerous pronouncements on how the indigenization policy was to be implemented, most of which shifted within six months of their announcement; or were completely done away with when a new cabinet minister for the government ministry in charge of indigenization was appointed.
The uncertainty created by inconsistent pronouncements on how the indigenization policy was to be implemented cannot be understated. Companies operating within the country whose type of business required large capital expenditure, for example in mining or manufacturing, could not plan investments in the face of uncertainty on how the indigenization policy was to be implemented. Furthermore foreign based entities that were planning to set up operations in Zimbabwe as foreign direct investment had to halt any intended investments until there was certainty on how the indigenization policy was to be implemented. The uncertainty regarding the manner in which the indigenization policy was to be implemented not only halted new capital investments, but it led to capital flight because of the increasing country risk profile of Zimbabwe in the historic context of the chaotic indigenization of land - the Land Reform and Redistribution Programme - which was implemented by the Government of Zimbabwe from 2000. A halting of new investments and capital flight only contributed to increased unemployment and falling demand, feeding the death spiral of the formal sector and increasing the informal nature of the economy.
What needs to happen next?
Now that the new government under President E.D. Mnangagwa has provided clarity with regards to the indigenization policy, there is a need for the private sector management to carry out their responsibility to adapt to the business environment.
One of the major findings of a study I conducted at the University of Zimbabwe on the perception of the business environment in Zimbabwe between 2008 and 2014 was that business confidence in the external environment in Zimbabwe may depend on how well a company is performing rather than actual factors in the external environment. This finding highlighted a possible weakness of judgement by business leaders in Zimbabwe as business confidence in the external environment should not depend on how well a company is performing but on a fair assessment of the environment and the opportunities or threats that exist within such environment.
On the other hand the performance of a company in a relatively stable macro-economic environment such as experienced in Zimbabwe with the advent of the multicurrency system, or loosely termed 'dollarization', does not depend on the external environment itself but on adaptability to the opportunities and threats provided by the external environment - it depends on management's ability to adapt.
The external environment is a factor that is beyond the control of the business organization in any economy, whether in a liberal economy such as the United States, or in a state controlled economy such as North Korea. However, how well a business organization performs is within the control of management as it has the responsibility to make the necessary changes to adapt to the external environment to remain competitive at a local, regional and global scale.
The current forex shortages in Zimbabwe may provide an opportunity for Zimbabwean companies to adapt. The use of bond notes may actually create incentive to revive local manufacturing. Much lower real wages, electricity tariffs, municipality tariffs and government taxes payable in bond notes may result in much lower costs of production. Lower costs of production, coupled with unaffordability of imported products in the mass market, may become incentive for developing local manufacturing in the medium to long term and opportunity to export and earn the precious forex.
Zimbabwean companies need to immediately start developing local supply chains wherever possible sourcing locally produced goods and inputs. For example, it makes no sense at all to be importing vegetables and fruit juice from South Africa using forex sourced from the black market, passing the price on to consumers, and then complaining that the RBZ is not allocating forex for imports. Its simply silly.
At some point consumers will not afford to buy the overpriced products on shop shelves and it is the Zimbabwean companies operating retail and distribution businesses that will shut down. Smart management will adapt whilst current cash flows still allow them to do so in order for their businesses to continue operating into the distant future.
Meanwhile the RBZ should focus its attention on allocating forex only for power, fuel , medicines for government hospitals and clinics and industrial chemical imports and not for every need for forex that exists in the market because it is unsustainable.
The private sector as well as individuals should indeed source their own forex for whatever they seek to import or pay for overseas including vehicles, university fees and so on - the list is infinite. At the same time the RBZ must allow whoever wishes to demand payment in hard currency for their products or services to do so, and float the bond note currency in our bank accounts within a reasonable range for example 1USD:3 Zimbabwe Bond Notes and let market forces take action.
As I concluded in my paper on perception of the business environment in Zimbabwe between 2008 and 2014; input to governmental policymaking from a management which fails to adapt to the external environment is disruptive. A failure to innovate new business solutions to adapt to the prevailing external environment will instead be described as a failure of the external environment which governmental policymaking must address.
Constant adjustment of Zimbabwe government policy positions to counter continuously arising 'challenges' in the external environment such as forex shortages (we have had 'liquidity crisis' and 'high wage bill' recently) without due investigation results in poor and inconsistent policymaking which creates a continuous cycle of real and perceived instability. As the saying attributed to Thomas Jefferson goes, "That government is best which governs the least, because its people discipline themselves."
Gilbert O'Neil Mushure
Founder and Fund Manager
Asia Africa Business Research Institute
Website: www.aabri.org
Lecturer at the University of Zimbabwe, Faculty of Commerce
Source - Gilbert O'Neil Mushure
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