Why local products cost more

On average, capacity utilisation of the manufacturing sector is around 60 percent.
This is a drastic improvement from the 2008 scenario, where it had fallen to an all-time low of 10 percent.
Some sectors, among them paper and printing, clothing and textiles, are still producing at very low capacities of around 20 percent. Economists say with such capacity levels, local products cannot compete with regional goods, especially South African products. This is specifically so because when a company is operating at low capacity, certain variables, such as fixed costs, are spread over very few items produced.

The end result is high unit cost.
“Some of the factors making Zimbabwean products very expensive — which is synonymous with all products, be it food or motor vehicles — are liquidity challenges, poor infrastructure, outdated equipment and management inertia,” said Mr Gift Mugano, an economics lecture at Nelson Mandela Metropolitan University in South Africa in an interview yesterday

“They have failed to come up with new business models that reflect a new order.”
Mr Mugano said Zimbabwe was a “cash-trapped economy” and the bank deposits were transitory, making it difficult for banks to offer long-term loans to industry to recapitalise.

Under a dollarised economy, the source of money was through exports, foreign direct investments and transfers from the Diaspora.
But Mr Mugano noted that sources of foreign exchange were performing poorly.
“Zimbabwe’s trade balance had been always been negative, with 2011 deficit registering a staggering US$5 billion,” he said.
“FDIs, on the other hand, registered a paltry US$387 million in 2011, while other regional countries such as Mozambique received FDI in the region of US$2 billion per year.

“This exacerbates the liquidity situation, resulting  in high cost of financing that goes into the industry, with some as high as 60 percent per annum.
“For instance, companies in South Africa receive very low and long-term finance which makes their cost of production very competitive.”

Another economist with a local financial institution said most companies were borrowing at “extortionate rates” of around 15-25 percent, compared with regional firms, notably SA, where the lending rates are as low as 8 percent.
“Thus, a company operating in SA has access to cheaper funds than a company in Zimbabwe. The cost of borrowing has to be recovered from the consumer and this cost is included in the final price a consumer pays,” said the economist.

Poor infrastructure — electricity, water and transport — are key enablers that make industry tick.
But the current situation of load-shedding results in high cost per unit due to disruption of production and the high cost of running diesel-powered generators results in Zimbabwe pricing itself out of the market.

Shortage of water also constrains business operations. To make matters worse, Zimbabwe is on the high side in the pricing of these utilities which makes the cost of doing business relatively more expensive.
Zimbabwe’s transport system is in a serious state of decay with poor road and rail systems. A combination of these challenges in the transport sector is that the country will continue to have high transport costs that feed into the high cost of production.

Zimbabwe’s equipment in most plants has outlived its lifespan, causing inefficiencies.
“Most firms in Zimbabwe are still using old technology, whose normal loss is around 50 percent of input material.
“The huge wastage is passed to the final consumer,” said a plant engineer with a local packaging company.

But Confederation of Zimbabwe Industries president Mr Kumbirai Katsande noted that local companies with multinational links have access to the latest technology and long-term funding which makes them able to compete at international level.
He said agriculture also needed to perform at that level.

“Pricing needs to respond at that (international) level. Multicurrency has changed the rules of engagement. This was a big game changer. Prices are now set at international level,” said Mr Katsande.
He added that competitiveness was important and “we need to produce at cost levels equal or lesser than Zambia, South Africa and China (to compete favourably).”

Low farm output has resulted in high cost of foodstuff production. Zimbabwe is currently importing commodities such as maize, wheat and soyabeans. Moreover, the local yields per unit are relatively lower than in South Africa and Botswana, where farmers are using genetically modified seeds.
Some of the local goods that are highly priced over imports include cooking oil, washing soap, detergents, sugar, cereals, flour, potato chips and an array of canned products.

In the case of cooking oil, the imported brands extract the product from soyabean that is genetically modified and hence cheaper than the conventional crop used locally.

Trade experts have raised concern over the uncompetitiveness of local products, saying Zimbabwe, being a member of enlarged markets such as Comesa, EAC, and Sadc, with gross domestic product of US$1 trillion,  will find it difficult to exploit the markets due to the high cost profile of its goods.
Trade statistics from Comtrade, the UN data collecting agency, show that Zimbabwe has negative trade balance with Comesa, EAC and Sadc because of the poor performance of its economy.