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ZIMBABWE: Forced price cuts drive down production

10 Jul 2007 18:47:33 GMT
Source: IRIN

HARARE, 10 July 2007 (IRIN) - A government operation forcing businesses to reduce prices by 50 percent will drive manufacturing under, push unemployment up and bolster the informal market as basic commodities become scarcer, analysts have warned.

A new task force, set up to monitor and enforce compliance, ordered manufacturers, wholesalers, retailers and other service providers to reduce their prices to June 18 levels; but a simultaneous salary increase for civil servants, which topped 600 percent, sent the prices of basic commodities, clothing and transport fares shooting up.

Reacting to the spike in prices of commodities, President Robert Mugabe recently accused commerce of trying to foment discontent among the people ahead of next year's presidential and parliamentary elections.

Over the past two weeks, teams comprising the police, ruling ZANU-PF militias and other government employees have been raiding factories, wholesalers and shops and forcing them to sell at reduced prices.

The crackdown, codenamed "Operation Reduce Prices", has led to the arrest of 33 company executives and resulted in basic commodities disappearing from shelves, amid threats that those who failed to comply with the order would have their businesses nationalised.

"At the moment there is hardly any production taking place, and there is a real possibility that manufacturing will grind to a halt and, naturally, more people will be thrown into the streets, and that means higher levels of poverty," Innocent Makwiramiti, a businessman and former chief executive officer of the Zimbabwe National Chamber of Commerce (ZNCC), told IRIN.

"As was the case with the compulsory acquisition of land [during Mugabe's controversial land-reform programme], the process has been rushed. The government did not put into place mechanisms to ensure that business would survive, and that there would be sustained availability of commodities on the market."

Makwiramiti said manufacturers and wholesalers had adopted a wait-and-see attitude, reluctant to carry on trading out of fear that they would suffer huge losses.

John Robertson, an economist based in Harare, the capital, said the emergence of a more robust informal market for commodities - as had happened with the informal trade in foreign currency - would result in prices shooting up because the government lacked the capacity to monitor and control informal markets.

"Manufacturers stop producing because carrying on with business would not make any sense, as they would be running at a loss," Robertson explained. "Worse still, goods on the black market tend to be of inferior quality and are unhygienic."

Production grinds to a halt

According to John Munhenga (not his real name), a manager at a chemical products firm in Harare, the factory had stopped making new products, concentrating instead on disposing of the stock in hand that they had been ordered to sell at reduced prices.

"The monitoring team came to our factory and ordered us to lead them to the warehouse where we keep goods that are ready for dispatch. They took an inventory of the commodities and ordered us to sell to wholesalers, warning that they would be making periodic checks to see if we were complying," he said.

"We don't have a choice but to comply, even though it would take us a very long time to recover. But distributing the old stock, most of which had been ordered in advance by wholesalers, is all we are doing; we have literally downed tools."

Munhenga said even buyers who had already placed orders had scaled down their orders due to the hyperinflationary environment. At most, quotations were valid for three days and, since wholesalers had reduced the quantities they were buying, he feared that part of the stock would go bad and would have to be thrown away.

Factory workers now only report for duty three times a week and are not actually doing any work, sparking fears among employees that they could be laid off if normal production does not resume soon.

From bad to worse

"Before the price slashes we were already going through a lean period: we were having a tough time sourcing foreign currency to buy raw materials, machines were in disrepair and we were losing skilled manpower to other countries. Add to that frequent power cuts that were disrupting production and the picture of gloom is complete," said Munhenga.

He is afraid that the government might take over the company if its inability to carry on manufacturing is misinterpreted as an act of defiance, and even though the company's board has considered relocating to a country more conducive to doing business, the process would be complicated.

"Relocating a company is not like seeking for asylum, where you can jump the border without carrying anything along. There is need for you to first look for investment, go through painstaking negotiations and make thorough consideration about staff, retrenchment and finances," said Munhenga.

The erosion of investor confidence due to the land invasions that took place during the land reform programme, which started in 2000 and displaced around 4,000 white commercial farmers, drastically reduced industrial activity - the Confederation of Zimbabwe Industry recently reported that industry had shrunk by 67 percent.

Wholesalers said they were forced to reduce purchases from manufacturers, because retailers were reluctant to maintain the volumes they had been buying from them.

"It is naïve for someone to accuse us of refusing to sell to retailers because, in as much as we want to keep on doing business, those who used to buy from us are now reluctant to buy in large quantities," said Brighton Muzira, 50, branch manager of a wholesale business in Harare.

Informal traders profit

While manufacturers, wholesalers and retailers have slowed down, informal traders are moving in to fill the void, making quick profits by selling basic commodities like cooking oil, soap, cement and sugar that they either import or source from producers through the back door. Analysts say the informal market already accounts for around 60 percent of the economy.

"Business is brisk because the items that I sell can no longer be found in shops," said Cecilia Moyo, 26, who sells cooking oil that she imports from South Africa. "The cooking oil business had become congested because almost everyone was doing it, but the rising demand is giving a smile to my face again."

Like many other vendors who operate on the streets, she has to contend with sporadic raids by the police and ZANU-PF militias, popularly known as the Green Bombers.

Moyo said the police and militia were accusing them of undermining 'Operation Reduce Prices' by charging high prices for goods sold illegally, and had been confiscating their goods and sharing them amongst themselves.

"But just what is it they want to achieve?" she wondered. "Because we are heading towards a situation where people will have money, yet nothing to use it on."

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Last updated:Tue Jul 10 18:49:49 2007