• economic climate

Zimbabwe Market Overview

– A Glimpse Into The Local Economic Climate

Context and background

From time to time, certain events occurring in an economy just do not make sense. Applying rational thought and experience does not seem to correspond with the events taking place and common sense. What might be missing is understanding the local context. Over the past 20 years, Zimbabwe has been the epitome of this phenomenon.

The article serves as an overview of enlightening observations made during a business visit in the beautiful country, Zimbabwe. Remarks made herein are based on dialogue with several senior executives. Decisions should not entirely be based on excel spreadsheets, NPV and IRR calculations. Instead, a decision should take into consideration what demonstrating care to our employees might mean, regardless of the cost. This is proving that we care for our employees. This calls into question to what the short-term impact might be, but to focus on the long-term organisational commitment to employees. A shift from performance to momentum, removing traditional barriers of typical metrics over a calendar year, financial period or quarterly results.

Context always matters, but often not an adequate amount of time is taken to understand the social meaning and realities fully. There is no way that this article can comprehensively be an accurate reflection of the lived reality of people residing in Zimbabwe. The content of this article should be read in conjunction with several other data sources to help drive decision making within organisations.

The purpose of this report is not to offend, call-out or point fingers, but to stimulate discussion around exploring solutions for employees in the private sector in Zimbabwe. The author acknowledges that the lens applied is narrow and neglects to account for most likely, the majority of the market structure.

It is further recognised that doing business in Zimbabwe is a daily balancing act, an act that forms part of a larger eco-system within groups of organisations, family structures, country structures, the African continent, and the world. The author’s intent is to ask some potentially tough questions in order to develop practical solutions for both the employer and the employee in Zimbabwe. At times emotions might surface but writing about lived experiences without the expression of emotion, is the equivalent of not smiling when one’s child takes their first steps – they go hand in hand.

This article is written with the utmost respect, care, and empathy. The mere fact that the author traveled to Zimbabwe should be an indication that they tried to understand a small portion of the context that is the reality of millions of Zimbabweans.

In most recent months and stretching back in the early months of 2019, market volatility has been observed in Zimbabwe. The driver of this volatility is based on several market conditions, political changes and one could argue several years of economic mismanagement. The VUCA acronym comes to mind when looking at the current market structure, operating environment and day to day living. Concerns noted around the political landscape is that it doesn’t seem like the appropriate dialogues are currently taking place between the ruling party and the opposition MDC, to establish what will move us forward. The ruling government is often quoted blaming the impact of sanctions on the economy, which then shifts the need to introspect on the root causes of the economic issues in Zimbabwe in order to drive the right solutions.

Mr. Ntshangase, in his research report titled “Currency volatility in emerging markets and its effects on business models in Zimbabwe”, explored in-depth the events that led up to 2020. Mr. Ntshangase explored how currency volatility is one of the critical factors that determine gains and losses on the foreign exchange market.

With the changing business landscape, that includes globalization and harmonization of global economies, currency stability is of great importance in ensuring sustainable macroeconomic growth. It is valuable for a country to have independent financial structures in place to ensure that there is stability on how the economy is governed. Businesses, in turn, need to have functional treasury departments whose role is to ensure that the exposure of the company to foreign currency risk is under control.

With this in mind, his study sought to understand how currency volatility has impacted Zimbabwean business operations and what mitigating adjustments businesses have had to make to their traditional business models to limit the risk. The author recommends that any reader of this report also reviews Mr Ntshangase’s work to understand better the business environment, history and context that is currently experienced in Zimbabwe.

De-dollarization of the economy

In early 2019, post-de-dollarization, the Central Bank Governor of Zimbabwe, Mr. John Mangudya, was looking for additional revenues to help fill the Fiscus of the government coffers. There was a 2% tax levied on all Ecocash transactions, of which Ecocash is widely used in the informal sector. (Ecocash is a mobile phone-based money transfer solution.) This is key based on the incredible role the informal sector plays in the market structures. The informal sector plays a significant role in Zimbabwe because a number of companies closed down due to economic instability, and there exists a number of small-medium enterprises trying to bridge the gap. What is quite interesting is that the Zimbabwean economy is definitely divided between a formal and an informal sector. The informal sector, some might say, represents as much as 70% of the current market structure. Large chunks of the country’s economy run through electronic systems and mobile money, which is dominated by Econet’s Ecocash with a 95% market share. It’s estimated around 5 million transactions a day moving more than $200 million.

When the author thinks about the well-being of a country, they don’t only take an economic view. By only applying one lens it creates a limitation on the holistic evaluation of a state. The author would initially consider the social and political landscape in a country in addition to the economic view. There are however an array of other factors the drive the overall well-being of a country and its population.

What is different now versus 2008 hyperinflation period

Goods and services are available, but the cost is exorbitant, with multiple rates existing: Interbank rate, official rate, and market rate. In the informal sector, buyers may pay rates as high as 30 Zimbabwean Dollars for goods, whereas it might cost 1 United States Dollars (USD). The exchange rate was pegged initially early March 2019 at 1:1 but has since depreciated significantly.

The division between the formal and informal sector leads the author to two other points of consideration, which are the social and legal environment. From a legal point of view, it is illegal to trade in US dollars in the private sector, but in the informal sector USD is the preferred legal tender. Should the private sector, however, be found, trading in USD, harsh penalties will be imposed on them. However, from an environmental point of view with the formal and informal sector being represented, the informal sector represents the social impact of this trading and the behaviour that is driven in the local market. The author grasps that traders prefer USD for value to be preserved. The author found it fascinating how complex economics play out in a day to day base, how hedging, inflation protection, and currency exchanges happen as if it were so typical.

Many people in Harare do shop at Mbare Musika, which is one of the largest local markets. It has been observed that the flow of cash in this market disrupts the official rate versus the market rate. It is estimated that millions of US dollars are in circulation within the closed informal market economy. It is interesting that the 2% tax that was levied on all electronic transactions in order to bridge the fiscal gap could be having unintended consequences such as the acceptance once again of the US dollar or another currency, which the government has been trying to eliminate. It has been recently reported that the South African Rand is being accepted as the potential legal tender within the market.

What then are some of the avenues employers may want to consider during this volatile period to remain within the law and at the same time meet continuing employee expectations that often are paraded by Employers of Choice as an Employee Value Proposition (EVP).

Impact on the formal workplace

It seems that people are suppressed, and a form of presenteeism can be observed, which is understandable, driven by the economic situation in Zimbabwe and the reality of not being able to meet basic needs. Outdated policies of 8 – 5 working hours, or a feeling of one needing to be grateful to have a job come to mind in an economy where the 95% of the economically active people in the country are believed to be out of work. It is a tight market to drive employee engagement with so much else going on. The cost of living is too high (food, transport etc. vs the salaries people are getting, at the same time high inflation rates erodes the purchasing power of salaries. Some employees might even take the view that they are subsidising their employees because their salaries are not enough to cover just the transport costs to and from work in a month.

Prof. Adrian Saville proposes six factors that drive economic growth in developing markets, referred to as the six-pack; those factors are savings and investments, policy and institutions, healtHRare, education, demography, and connectedness. The author has gone and dissected these into economic, political and social capital items savings and investments accounts for economic, strong institutions and consistent policy and institutions for political capital, health care, education demography, and connectedness, for social capital. These factors are critical to potential consideration of appropriate actions, i.e. take care of the healtHRare needs of employees.

Savings and investments – with inflation skyrocketing people cannot save fearing that inflation will erode their savings. Investments – the country cannot attract foreign direct investment (FDI) because of the instability on currency, property right etc. there is an overall lack of market confidence.

Policy and institutions – there is too much interference by the Government on the Reserve Bank, calling into question its independence. A question may be asked, as in many other countries across the world if politicians have too much control and power?

HealtHRare – public healtHRare has basically collapsed there is an overall lack of medical equipment; for example, things like gloves are not found in a public hospital. Lengthy strikes were drawn to an end thanks to bailing out by Strive Masiyiwa– each Dr. receiving a small amount monthly from his foundation.

Education – An area that has been maintained, not without commentary being provided. ZIMSEC, which is the local examination council, has been criticised for setting the standard so low, that many people are just passing through the system without a rigorous process.

Demography – like any other African country, they have a large young population – which is not working. Yes, they go to universities there are no jobs afterward. This may lead to civil unrest, should the young job seekers not find productive avenues to soak up their vibrant energy.

Connectedness – besides having a lot of people outside of Zimbabwe looking for greener pastures, there is not much connectedness between Zimbabwe and other countries. Sanctions – means they cannot trade with other countries.

It will take some time for the economy to stabilise and possibly reach an acceptable functional state. It is anticipated that this could take years to stabilise the economy. There is a framework that is often used in analyzing a specific market, which is referred to as the PESTLE framework, political, economic, social, technological legal, and the environment for a political stance.

Not much detail is shared in this specific report, as it is not the objective thereof, but at this point, the President Emmerson Mnangagwa is supported by the Finance Minister, Mr Mthuli Ncube, alongside with the central bank governor Mr John Mangudya are working hard to align the economy with their vision. To help establish an export lead economy, that is connected to its neighbours — a marketplace where investment is lead government and followed foreign investors and not driven by consumer behaviour.

Applying inflation as a measure for salary increases

Inflation is an essential yet flawed indicator applied to salaries and compensation decisions. The author holds the view that inflation is a useless measure in isolation, but valuable when used in conjunction with other indicators. As almost all companies use it as a proxy for salary increases – it can be used and probably should be used – but it is treated out of context. The first statement is quite a bold statement; the author would like to take a moment and delve into some detail around this concept.

Inflation is defined as “the rate at which prices for goods and services rises and, inversely, the rate of which the purchasing power of currency falls. Inflation is measured as a percentage change over a period of time (usually one year). A positive change means inflation; a negative change means deflation.”

In essence, we look at a basket of goods – my question to any person would be where our employee in this basket is? How do we measure the worth of our employees by applying inflation? The concept of paying someone a salary is that we pay them to do a job.

That “job” has a going rate in the market – market surveys exist to determine what the “Market” is paying. These surveys typically take into consideration the supply and demand for labour as it reflects the actual salaries of employees at a point in time.

Where there is an oversupply of labour, salaries would fall below the typical rates – we see this phenomenon at lower levels within an organisation, where there is an oversupply of labour, readily and easily available in the market. Where there is a high demand, but low supply – Higher grades, we also pay higher – this is the fundamental economic principles of supply and demand side. I would further argue that inflation is an arbitrary measure – something that few people know is that each country has their own basket to measure inflation – there is no single uniform basket in the world – not only that but also, they have different weightings by category. Finally in some instances when goods are measured, they are categorised as a bottle of peanut butter – in recent years’ the bottle has gone from 500 grams (gr) to 400 gr to 300 gr, but the measure is still one bottle – but staff are in reality getting much less – but the statisticians always measure a bottle instead of saying a jar of 500 gr.

One could argue that year on year, inflation is a valuable indicator. In this instance, one is applying the same weighting and basket of goods in a country, and it is providing a relative change in the cost of goods. This is valuable when protecting the purchasing power of an employee. A counter-argument would be, should organisations then not only adjust a percentage of inflation susceptible to inflation?

Nowhere does inflation take into consideration the supply and demand of people, people who are remunerated by salaries. Where does inflation take into account the location of our staff, the inconvenience of remoteness, etc.? Staff are paid a salary to do a job, a salary that is driven by market economics – why then use inflation?

In the author’s experience, how it typically works in organisations is as follow: Finance determines inflation from some source and feeds this to HR for budgeting purposes without taking into consideration the alignment to the existing market conditions and our business strategy – as you would know our business strategy drives our HR and as such Reward strategy. Whereas HR should be giving Finance a budget % – this seldom happens.

In reality – Finance gets inflation, plays around with the budget – and now when it is crunch time – budgets are cut – neglecting the impact on business. HR can often also not feed Finance a budget – because if they do, Finance will be scared with the actual amount – not knowing that the sooner they act, the better.

Retirement savings

The question the author would ask is whether retirement savings still make sense in a market with high volatility. Employees face a depreciating local currency and high levels of inflation. Purchasing power is eroded daily, but is a short-term gain at the cost of long-term savings worth it? Employer and employee contributions that are made to such savings schemes are literally eroded on a monthly basis with inflation being reported at 551% as at the end of December 2019.

If one looks at history in the Zimbabwean context, 2008/09 saw the total wipeout of retirement savings. We had now once again seen in 2019 a similar wipeout occurring. This begs the question, does this practice still make sense in such volatile markets, or are staff not better off by receiving the money today. That, of course, comes at a long term sacrifice and a follow-up question would be, whether companies would consider replacing the lost benefits of staff, based on depreciating currency and where does that responsibility lie?

The author would ask a question that if companies do care as much about their most valuable asset as what they say they do, what appropriate action would they take – or does care only stay within the confinements in terms of economic well-being when business performance is acceptable.

Indexing of salaries

Indexing would refer to pegging the movement of one component to that of another, in this instance local salaries to the exchange rate between Zimbabwean Dollars. Salaries can be indexed predominantly in two ways – carve out a flat amount or express indexing as a percentage of salaries. In applying the two indexing methods, variations there exists on how it may be used. Indexing a flat amount would suggest an egalitarian approach, typically acceptable in an unionised context.

Secondly, one can index, a percentage of the salary, which will allow for an equitable approach, as all staff levels will be indexed at potentially the same percentage of salary. This percentage of salary maybe 10, 20, 30, 35, 40 or 45%, all driven by affordability.

What else can be done?

Take your pick, I suppose? From subsidising transport for employees to providing food hampers on a monthly basis. Organisations might consider coming to some kind of an arrangement with retailers to offer their employees a set basket of goods. One of the concerns of staff is the ability to pay for the children’s school fees. Part of the six factors to drive economic growth is education. If organisations are able to pay for the school fees of the children of employees, one concern is ticked off. Should employees not send their children to school based on the lack of finance, a 10-year problem is created. If this concern can be taken off of the table by paying school fees, it will relieve some pressure off of employees. It can, at the same time, serve as a retention mechanism for top leadership general management senior managers, managers, key talent, high potential employees and staff at risk.

Where to from here

Prof. Nick Binedell outlines six factors for African growth. Constitutional democracy with principles like equal voting rights, term limits, competitive elections, the rule of law and the acceptance of political rivalry being accepted in society. Reliable and effective institutions, appropriate infrastructure – hard and soft, a bustling private sector, a growing middle class and the use of African Services. This road map, coupled with Prof. Saville’s factor for growth, creates a starting point. It creates clarity, certainty and most of all – cultivates emotions of hope for what is to come.

The author wonders when we as Africans will change our narrative of failures to successes, where we stand together and work to lift as we rise, where we help each other, instead of choosing foreign allies to provide assistance. An Africa where we unite across the continent to provide support where required. The world benefits from a fragmented Africa; there is no reason why Africa cannot and should not be a world superpower. It does not make sense for only one country to help, but we are not one we are 50+. If you want to go fast, go alone if you want to go far, go together.

From time to time, certain events occurring in an economy just do not make sense – Zimbabwe is such an example. Outsiders do not understand what 500%+ inflation means. Applying rational thought and experience does not seem to correspond with the events taking place and common sense. What might be missing is understanding the local context, have you taken the time to do so?

My fellow Africans, whether living locally or abroad, if you care – don’t tell me, show me.

A special thanks to my colleagues at GIBS that contributed to this article – Tabeth, Nyasha, Kudzai, Tino and many more for weighing in! #LiftAsWeRise