Strong rand to inflate Zimbabwe's import bill

1 Mar 2011

A strong rand is expected to increase the cost of imports from South Africa during the year 2011, giving respite to domestic producers who could capitalise on higher-priced imports to push their products into a competitive market, a research firm indicated.

But, said Renaissance Capital (RenCap) in its economic outlook for Zimbabwe in 2011, there would still be a downside to Zimbabwe's manufacturing sector from a strong rand as that would also inflate input and equipment costs.

"Although the agriculture sector has exhibited a strong recovery over the past couple of years, this has been off a very low base. This implies that the agriculture sector is not yet able to meet the manufacturing sector's requirement for inputs, so manufacturers still rely on imports," noted RenCap.

High imports from SA

"Two-thirds of Zimbabwe's imports come from South Africa. Inputs of raw materials account for an estimated 8% of total imports, and almost 20% of imports consist of capital goods. The dampening effect of a strong rand is likely to be more pronounced on capital equipment than on raw materials, as the demand for the former is more sensitive to an increase in cost," said RenCap's research team.

It noted that a strong rand would increase the cost of the manufacturing sector's inputs and therefore undermine the sector's recovery.

"On average, we project an appreciation of the rand in 2011 to ZAR7.00/US$1, from ZAR7.30/US$1 in 2010. A stronger rand in 2011 compared with 2010 will inflate the cost of importing goods and services from South Africa," said RenCap.

But it highlighted that local producers could use this opportunity to increase the shelf space allocated to their output by local retailers.

"Retailers and the distribution sector are responsible for about 20% of total imports. The stocking of shelves with locally manufactured goods is expected to support the recovery of the manufacturing sector."

But this, said RenCap, would benefit only those producers that source most of their inputs locally.

Negative impact on inputs, capital goods

RenCap said the dampening effect of a strong rand on consumer goods would be positive for Zimbabwe's current account, but its impacts on inputs and capital goods would have negative implications for manufacturers that depend significantly on imported inputs.

"The decline in raw material supplies in recent years, largely due to the collapse of the agriculture sector, compelled producers to import inputs from South Africa. An increase in procurement costs is likely to undermine the manufacturing sector's recovery. The upside for manufacturers and retailers that depend significantly on imported inputs and goods, respectively, is that the rand should weaken in 2H11 (the second half of 2011) and end the year at ZAR7.30/US$1, according to our estimates."