THE mindset for both business and labour is still to change with regard to the profit margins and wages increases they expect.
The business sector still cannot accept the fact that profitability in the new dollarised environment emanates from increased turnover, game of volume not an increase in prices.
In as much as the production costs are still high in Zimbabwe, companies should seek to increase production so as to benefit from economies of scale.
On the other hand labour does not appreciate the fact their wage demands should now be based on productivity and affordability by the business unit.
Productivity relates to the efficiency with which an enterprise converts its resources (inputs) into finished goods or services (outputs).
Increased productivity is achieved by producing more output with the same level of input.
When output per worker increases, workers’ contributions to firm revenue increase and also unit costs fall as economies of scale come into play. Thus the ability for business units to pay also increases. The inflation environment has significantly improved and can no longer be used as a determinant of wages.
This comes at a time when the year on year inflation for the month of January increased 2,89 percentage points to -4,81 percent from -7,7 percent in December. The Central Statistical Office, which started calculating price movements in United States dollars in December 2008 says the month-on-month rate rose by 0,73 percent in January, driven by food prices, which stood at 1,81 percent.
The month-on-month food and non-alcoholic beverages inflation stood at 1,81 percent, gaining 0,3 percentage points in December 2009 at a rate of -0,68 percent. Non-food substances stood at 0,8 percent, shedding 0,09 percentage points on the December 2009 rate of 0,89 percent.
When Zimbabwe switched to hard currencies at the beginning of last year, most items on supermarket shelves were imported. Within months Zimbabwean companies were back in production with capacity utilisation rising to 32,5 percent by June 2009 from around 10 percent, and were able to undercut foreign suppliers on price or produce better quality for a similar price.
But food processing is concentrated in the hands of a small number of companies. This has given manufacturers a comfortable base from which to start price hikes with some pushing through 18 percent-26 percent increases in January alone.
In the pre-dollarisation years, businesses stayed afloat by borrowing money at massively negative real interest rates and widening their mark-ups so that the typical business model became one of low volumes and larger mark-ups and margins to compensate for declining volumes.
Business should now focus on cost competitiveness and not make consumers pay for low capacity utilisation and poor productivity through price hikes.
During the Zimbabwe dollar era workers would also bargain for higher nominal wages citing the continued erosion of real wages by inflation, which according to official figures stood at 230 million percent in July 2008.
Now with inflation standing at negative 4,8 percent what is the basis for demanding higher wages as the fall in inflation means an increase in real wages on an annual basis or alternatively 0,73 percent increase on a monthly basis. After a decade of decline the Zimbabwe economy is on the mend due to improvements in macroeconomic policies especially the adoption of the multicurrency system.
In addition to putting an end to rapid money supply growth and curtailing speculative activities, the multicurrency system directly contributed to the immediate containment of inflation by arresting rapid price movements.
Such economic stability is a necessary condition for the creation of a conducive business environment. As a result, the economy is estimated to have grown by 4,7 percent in 2009 up from a decline of 10 percent in 2008.
However, dollarisation has left the country with an elevated cost and price structure, which cannot be “adjusted” immediately. Inflation outlook would be determined by increased production.
However, a major challenge facing business is the critical shortage of working capital making it impossible to meet local requirements raising fears of imported inflation.
Other cost drivers include higher cost of funding, wage demands, utility costs, rising oil prices and transport costs. – Kingdom Stockbrokers.
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