Business sector cannot remain indifferent to political question

WHILE Tony Blair is now history, Robert Mugabe continues to make history.
The Zimbabwean story will continue to be clouded by the country’s colonial baggage to such an extent that it becomes difficult if not impossible to discuss its current economic and political crisis in isolation of the Blair legacy.
While political actors focus attention on constitutional, transitional power sharing arrangements, and legitimacy, the economy of Zimbabwe ultimately is the victim with no visible salvation.
All the economic indicators show that Zimbabwe is in the intensive care unit and is embarrassingly competing to make a world record as the worst performing country.
The response of the government of Zimbabwe to the crisis has been predictable. Deny any responsibility for the crisis and instead target on a selective basis the usual suspects i.e. the former colonial masters, corrupt businessmen, unpatriotic actions by citizens, and naturally sanctions.
The argument advanced is that the economy is under siege and, therefore, unorthodox economic policies are not only called for by essential to protect the motherland from retrogressing to its former colonial status with the obvious implications on sovereignty.
What is surprising in the Zimbabwean case study is that while the economic indicators are pointing in the opposite direction, the business actors appear to be politically disengaged. The financials of these players appear to be immune from the harsh conditions suggested by the macro-economic indicators. With the exception of the agricultural sector where significant adjustments have been made on asset ownership, one finds no evidence of any significant divestment by any serious economic players as a result of the desperate economic situation.
The economic distortions caused by the current policy framework seem to be of benefit to the market players. Even adjusting for hyperinflation, companies continue to post profits in Zimbabwe.
Against a background of an uncertain future for any businessman operating in Zimbabwe, there has been no visible evidence of business actors switching their allegiances to the opposition. Some have attributed this to fear but could there be something at play. The Zimbabwean economy continues to be dominated by international players who have not shown any sign of jumping ship like what happened in the dying days of apartheid.
The sanctions regime is not targeted at the real economic beneficiaries of the crisis but on political actors. In fact, many investors are busy concluding deals with the seemingly discredited government of Zimbabwe. While some may argue that the government if illegitimate, the business actors seem to be unfazed by this. Even South African investors where the public opinion and particularly the corporate sector want President Mbeki to intervene, appear to be concerned about the distorted economic environment and political situation. They are positively identifying with the government of Zimbabwe’s policies by investing substantial capital in the country.
Notwithstanding the seemingly positive and aggressive posture taken by the private sector in Zimbabwe, concern remains on the impact of economic policies on economic transformation. While the economy is nose diving, at the micro level the businesses do not exhibit the same signs.
Ideologically, President Mugabe’s world view is no different from COSATU, the South African Communist Party and the non-state actors who share the conviction that the state should play a central role in economic activity. In fact, there appears to be consensus between these parties that the state should intervene and market forces should not be trusted as instruments for change. However, these parties do not share the same views on political governance.
Some have argued that the current Zimbabwean crisis is a direct result of the land issue but evidence suggests otherwise. The economic problems of Zimbabwe predate the formation of the MDC and the land issue. No serious discussion has been generated on economic issues presumably because the black majority in not only Zimbabwe but the rest of the continent is alienated from the ownership of assets and the interests informed by such status. Invariably, the focus in Africa is on who occupies the state house rather than what kind of policies are required to make Africa a winning continent.
Nothing demonstrates the challenges of nation building than the attitude to incomes and pricing policies. In the case of Zimbabwe, President Mugabe has never been convinced ideologically that devaluation has any place in a country like Zimbabwe. The control mentality is evident in the manner in which the country has approached the devaluation issue. The mentality predates Gono and is supported by many intellectuals and seemingly informed people.
The question that is often not addressed is whether such policies in practice help the poor or impose a penalty on the very people that are supposed to benefit from such policies. What is evident is that the business sector has largely been immune from the negative impact of the anti-devaluation policies choosing to find innovative and creative ways of circumventing such hurdles through participation in the financially rewarding parallel market.
On the ground, the government has chosen to turn a blind eye to this market at the macro level but has chosen to target a few players who have predominantly been black to cynically demonstrate a seriousness to tackle the negative impact of such policies. The Zimbabwean market has already internalised the sentiment that a no devaluation policy is an invitation to participate in the parallel market.
What is not clear is whether President Mugabe is sufficiently informed about the impracticality of his policy stance. It may be the case that at the ideological level, no one has been able to challenge President Mugabe on the futility of a policy framework that is alienated from the concrete realities on the ground.
To demonstrate the impracticality of the current policies that are informed by antiquated assumptions based on a historically discredited ideology, I have done a simplistic analysis set out below to show that if honesty was the guiding principle in Zimbabwe, no exporter would still be in business begging the question why people would still be investing in the country.




Profit & Loss
Profit & Loss

%
US$/Per Unit
# of Units
Z$ Equivalent
Z$ Equivalent




No inflation
With inflation
Inflation (%)




1000%
Exchange Rate US$1=Z$



15,000

Sales (units)


1000


Sales (Price)

6.67



Sales Revenue



100,050,000
100,050,000
Cost of Sales





Foreign Element
40.0%
2.13

32,016,000
32,016,000
Local Element
60.0%
3.20

48,024,000
480,240,000
Gross Margin
20.0%
1.33

20,010,000
-412,206,000
Other cash expenses
10.0%
0.67

10,005,000
100,050,000
EBITDA

0.67

10,005,000
-512,256,000
I have assumed that this company produces 1,000 units of a product that is exported. The price per unit is assumed at US$6.67 and the exchange rate is assumed at Z$15,000:US$1. The gross margin has been assumed at 20% with cost of sales at US$5.33 split into 40% comprising imported inputs and 60% comprising domestic costs. Operating costs have been assumed at 10% of the sales revenue resulting in earnings before interest, depreciation and amortisation (EBITDA) being US$0.67 per unit.
Using an exchange rate of Z$15,000 to US$1, the EBITDA translates to Z$10,005,000. However, when inflation assumed at 1,000% is taken into account, the same company will post an EBITDA loss of Z$512,256,000. Based on these numbers, if this company does not participate in the black market, there is no way in hell that it will remain in business.
It is clear from the above that in a hyperinflationary environment, no exporter will remain in business under a policy regime that says devaluation is out of the question. If this is the case, why then would the business sector be indifferent to the political question and allow only three individuals i.e. Mugabe, Tsvangirai and Mutambara to crowd out their interests from the political discourse? Could it be the case that through the RBZ, the business sector is operating under a different regime than what is publicly disclosed?
I am informed that the parallel exchange rate is now at Z$38,000 to US$1 while the official exchange rate is pegged at Z$15,000 to US$1. If this is true, can you imagine the impact this has on the vulnerable groups in Zimbabwe who have no foreign currency to trade in the parallel market.
To the extent that President Mugabe does not subscribe to liberal market principles, what policy framework should inform a new Zimbabwe? For 27 years, President Mugabe has not shown any change in terms of his world view and the consequences are telling. What impact would another term have on the patient called Zimbabwe is a question that can only be addressed if an honest assessment of the policy regime that has informed post-colonial Zimbabwe is undertaken and hopefully become part of the conversation of those who believe that Zimbabwe’s problems may largely be self generated.