Zimbabwean companies went through a rough ride during the third quarter of this year mainly owing to price controls. Many firms closed down, scaled down operations, retrenched workers or forced workers to go on leave. Besides the 'traditional' operational challenges of persistent foreign currency shortages, escalating inflation, fuel shortages and power cuts, price controls also significantly squeezed profit margins.

By Lee Shungu

Some companies which publicly confirmed feeling the pinch entail Innscor, Edgars, OK Zimbabwe and Lobels, which were in turn threatened to be taken over by the state.  Edgars and Innscor have since shed off some of their branches and cut down workforce around the country.

The companies said the price slash directive was a huge blow to investors most of them reported restocking problems due to difficulties in sourcing the stocks from suppliers.  The suppliers had since reduced production owing to reduced viability emanating from the price controls. 

According to a report by Kingdom Bank, on the Zimbabwe Stock Exchange (ZSE), the industrial index growth declined from 971.26 percent during the second quarter to 100.53 percent during the third quarter. 

Since the halting of price increments by the government through President Mugabe, basic commodities have disappeared in shops and supermarkets.  The shelves are clear of mealie-meal, cooking oil, sugar, flour, salt and meat.

Currently, goods and commodities are being found at exorbitant prices in some shops and on the black (illegal) market.  A bag of 5kg rice costs not less than Z$7millon, 2litres of cooking oil costs Z$3 million and a bar of washing soap costs not less than Z$1million.

The mining sector, however, was not affected by price blitz.  This, coupled with the continued firm international metal prices, saw the resources index rising by 385.43 percent during the third quarter up from a growth rate of 228.18 percent recorded during the second quarter. 

"As it stands now, the operational environment is not for speculative investors but those who look beyond the 2008 elections and other polices that have a negative bearing on business performance," says a Kingdom analyst.

Zimbabwe's inflation outlook continues bleak on the back of many unattended factors that are necessary in developing local companies. The survival of local firms strongly depends on the inflation and interest rate outlook and price controls.

The analysts add some factors which urgently need attention include foreign exchange shortages that has caused firms to source the scarce commodity on the illegal parallel market at rates that are very much depreciated, excessive money supply growth that stood at 1638.4 percent at the beginning of the year and acute food (maize and wheat) deficit which will cause a significant increase in the prices of basic commodities.

The resultant food imports will cause further pressure on the already precarious foreign currency position and a further depreciation of the black market exchange rate, high government budget deficit to meet, among other things, high social welfare services, which will be financed by borrowing from the domestic banking sector through cheap Treasury bills.

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