Ceteris Paribus: The manufacturing sector is slowing down despite greater investments

In the recently released annual manufacturing sector survey by the Confederation of Zimbabwe Industries (CZI), Zimbabwe’s manufacturing sector reflects a slow production trend despite greater investment in development.

This has led to a decline in the sector’s contribution to gross domestic product (GDP), raising alarm about the prospects for achieving economic growth by 2030 and what needs to or could be done. According to the study, capacity utilization in the manufacturing sector remains negative for the second year in a row, falling from 56.3% in 2021 to 56.1% in 2022, before falling by a further 2.9% in 2023 percentage point to 53.2%. It is worth noting that the FMCG sector in the food industry has remained relatively stable, reflecting the elasticity of demand with low disposable incomes inflation over the period. Beverage producers (typically Delta and Varun) boasted above-average production capacity utilization of 61%. In turn, the worst recession or stagnation (in relation to a specific manufacturer) was experienced by producers from the materials industry, recording approximately 36% utilization.

In comparison, capacity utilization in this context essentially means the link between the output generated using available resources and the potential output that could be produced if all the production capacity in Zimbabwe was used in total.

On the one hand, capacity utilization in Zimbabwe has shown an Elliot wave-like trend since the early 2000s. In this trend, the index shows an upward trend, which is always followed by a corresponding downward trend.

However, based on a 10-year trend analysis, Zimbabwe recorded its lowest capacity utilization in 2015 at 34.3% and its highest point record at 56.3% in 2021. This means that the 2023 level of 53 .2% is the third highest in a decade. The trend in capacity utilization over the years shows a strong correlation with exchange rate and policy changes over the years, which attributes production performance largely to macroeconomic factors. It is essential to note that manufacturers sometimes intentionally reduce capacity utilization or rather do not increase capacity utilization in response to the prevailing business cycle. If a company anticipates increased demand for its products, capacity utilization can be increased, but the opposite is true.

Demographically, Zimbabwe’s local market is not ready for large-scale production. Therefore, manufacturers often consider the profitability of the export market before deciding to increase production capacity utilization. A number of factors limit Zimbabwe-based manufacturers from producing goods for the export market, resulting in lower capacity utilisation.

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Currency and policy stability after dollarization led to a sharp recovery in the manufacturing sector, reaching a high utilization rate in 2011 of 57.2%. However, continued growth meant room to venture into the export market for surplus products. This was not feasible due to the use of a currency that was stronger than that of the target countries. As a result, producers had to reduce excess production to match local market demand because local goods were too expensive for the export market. The rapid introduction of another too weak local currency meant competitive prices on the export market and less competition from imports, which were now considered expensive. Consumption of locally produced goods began to increase in 2019 and is growing exponentially.

However, local producers suffered from a lack of foreign exchange from both the central bank and exports, and remittances to Zimbabwe exceeded export receipts due to the less competitive quality of local goods. In order to improve quality in line with international standards, manufacturers require significant amounts of foreign currency to replenish machinery and expand operations, which discourages the shortage of foreign currency. Due to the phasing out of production activities, the contribution to GDP has decreased almost 1-fold since the 20th century, from a high level of 25% to approximately 14%. Meanwhile, since then, commercial activities (wholesale and retail) have come to dominate the contribution to GDP, reflecting the significant import position on local shelves.

• Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — [email protected] or [email protected], Twitter: TWDuma_