High production costs make local products less competitive

Nelson Gahadza

Zimbabwe’s operating environment remains challenging for businesses due to high production costs, making local products less competitive in the region.

Manufacturers are also facing unfair competition from unregistered operators who do not pay value-added tax and do not comply with various regulations.

Power outages have also persisted owing to frequent breakdowns at Hwange Power station and low water levels at Kariba amid drought conditions.

As a result, business operations continue to be disrupted, and alternative power sources have exerted cost pressures on them.

Experts who spoke to Business Weekly said the most optimal strategy in the short to medium term is to balance revenue maximisation and capital preservation.

Business analyst Kudakwashe Mundowozi, in an interview, said that by adopting a multifaceted approach that includes government support, infrastructure development, and investment in technology, Zimbabwe can significantly reduce production costs and enhance the competitiveness of its local products.

“Drawing lessons from regional peers and historical successes, Zimbabwe can implement targeted policies to modernise its manufacturing sector, improve infrastructure, and develop a skilled workforce.

“Providing tax breaks or subsidies for companies investing in modern, energy-efficient technologies can help reduce long-term production costs and increase efficiency,” he said.

Similarly, he added that continued investment in transportation and energy infrastructure can lower logistics and operational costs, making Zimbabwean products more competitive in the regional market.

Mundowozi also highlighted that ensuring a stable macroeconomic environment with predictable exchange rates and low inflation is crucial for fostering business confidence and attracting investment.

He added that by implementing prudent fiscal policies and maintaining economic stability, Zimbabwe can create a conducive environment for sustainable economic growth.

“With the right support and collaboration, Zimbabwean companies can navigate the challenges of high production costs and thrive in the regional market, driving economic growth and prosperity for the nation,” said Mundowozi.

According to the Confederation of Zimbabwe Industries (CZI), the 25 percent foreign currency retention policy is considered a challenge for exporters, as it erodes incentives to export.

It believes the issue will remain a significant export restraint unless the exchange rate distortions are addressed.

Stockbroking and equities research firm IH Securities said policy volatility has created risks for businesses, especially in consumer-facing sectors, and fiscal changes in 2024, such as limiting VAT exemptions to certain categories, have increased costs.

But according to Mundowozi, Zimbabwean companies such as Delta Corporation and Econet Wireless have made strides in optimising their production processes.

He said Delta Corporation, for instance, has invested in modern brewing technology to reduce energy consumption and improve efficiency, while Econet Wireless has focused on digital solutions to streamline operations and reduce overhead costs.

“However, these efforts need to be more widespread. The government can play a crucial role in facilitating this transformation by introducing policies that could help, such as providing tax breaks or subsidies for companies investing in modern, energy-efficient technologies that can significantly reduce long-term production costs,” he said.

He noted that in South Korea, the Korean Digital New Deal has been instrumental in modernising the manufacturing sector by offering financial incentives for investments in digital infrastructure and smart manufacturing technologies, and this initiative has reduced costs and increased efficiency.

“By adopting a strategy similar to South Korea’s Korean Digital New Deal, Zimbabwe can modernise its manufacturing sector, reduce production costs, and enhance the competitiveness of its local products.

“This approach not only benefits businesses but also contributes to the overall economic growth of the country,” he said.

Mundowozi also highlighted that improving transportation and energy infrastructure is crucial for lowering logistics and operational costs.

Economist Dr Prosper Chitambara said local companies should leverage the digital economy to enhance efficiency, but most importantly, to lower the cost of production.

“The doing business environment requires significant efforts from the government, and companies on their part should invest in technology in order to streamline some production cost lines,” he said.

General Beltings, a Zimbabwe Stock Exchange (ZSE) listed counter in its half-year financials, said notwithstanding government measures, local cost structures are still uncompetitive relative to regional and global trends due to the increased dollarisation in the economy, which among others included utility costs.

Economist Victor Bhoroma told Business Weekly companies have to adapt and evolve within the space provided or risk closing shop.