HARARE – That Zimbabwe relies heavily on imports of most of its raw materials for industrial productivity is a well-known fact – and that requires a large chunk of foreign currency.
Some of the top partner countries and regions from which Zimbabwe imports raw materials include African-based countries such as Zambia, South Africa, Malawi, Namibia, Mozambique, as well as Europe and Central Asia.
The Reserve Bank of Zimbabwe (RBZ)’s foreign currency auction market is debatably hailed for bringing currency stability and improving foreign currency access to manufacturing firms.
The latest data provided by the Central Bank as part of its ‘commitment to regularly keep the public informed of developments in the foreign exchange market’, shows that the bulk of the allotted funds (60%) has gone towards payment of raw materials (US$794.7 million) and machinery and equipment (US$382.5 million).
This applies to the period June 2020 to the end of August 2021.
Raw materials alone accounted for 40% of the US$1,967 billion total allotted to companies at a value of US$794.7 million whilst machinery and equipment accounted for 19% at US$382.5 million.
The remaining 40% of the cumulative total has gone towards payment for consumables, pharmaceuticals, and other critical needs of the economy, as RBZ data shows.
Get Holistic, Assess Risk
Dependency often comes with the risk of being manipulated. Suppliers (foreign) are at the liberty of determining prices and it’s the very foreign markets our local industry is seeking to sell finished products to, which essentially boost the country’s export earnings.
The heavy reliance on the importation of raw materials for production poses the risk of making the locally manufactured products less competitive on the export markets.
“The devil is in the details”, it is said. The heightened demand for raw material imports does not match the end products as the appetite for imports remains at the peak.
Zimbabwe has for a number of years been constantly posting trade deficits, which under the rules of economics, the country should aim to close that shortfall.
The latest data for June shows that the country’s trade deficit widened to US$55.5 million in June 2021 from US$20.3 million recorded in May 2021. This is despite an increase in exports from US$487 million in May 2021 to US$503 million in June.
Imports grew by 10% to US$558.1million from the US$507.3 million recorded in May 2021.
Conversely, trade deficits can occur when a country is expanding and growing. Emerging markets traditionally have had to run trade deficits as they build up their infrastructure, factories, and housing to support a growing economy. Once the industries have been established, an emerging market could import less and instead, domestically source its needs from its manufacturing sector.
Zimbabwe is going through a period of growth which, however, is marred by a lack of transparency. The auction market itself, for instance, is marred by controversy where the RBZ is accused of allegedly manipulating the exchange rate to give a false indication that the economy has stabilised.
The Central Bank is also currently grappling with a huge foreign currency allotment backlog of over US$170 million which it has promised to clear by end of September 2021. These factors combined, again discredit the effectiveness of the official auction market especially when the parallel market premium has widened to near 100%, thus widening the risk of a huge economic fall.
Volatile costs and supply squeeze
According to a number of studies, raw material concerns always have been and remain top of mind for manufacturers.
The worries are not misplaced. For most manufacturers, materials costs (not just raw) make up the largest component of their cost of goods sold, even as labour costs seem to attract the greatest attention.
Inflationary pressures have been mounting as world economies seek to recover from the COVID-19 induced economic demise. Amidst such price volatilities, manufacturers are left gasping.
The outbreak of COVID-19
The outbreak of the novel global coronavirus pandemic (COVID-19) has also made the dependency on foreign raw materials worthwhile discussing again.
Global trade took a heavy blow as world nations restricted the movement of goods and human traffic as part of efforts to curb the spread of the virus.
For countries like China who have the capacity to stock well ahead of schedule the impact could have been lighter, but the same can not be said for emerging economies like Zimbabwe.
What should manufacturers be doing to depend less on the importation of raw materials? One possible solution is quite as hard. Zimbabwe could become more independent of raw materials imports through greater resource efficiency.
The process is gradual but in the long run, the country should work on capacity building to boost economic growth.