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production and reclaim a significant chunk of the local market that has been lost to South Africa.
A stronger rand means prices will be much higher for products from SA.
On average, the rand is expected to appreciate this year to R7,00/US$1, from R7,30/US$1 in 2010, according to Renaissance Capital in its Zimbabwe’s Economic Outlook for 2011.
“A stronger rand in 2011 compared with 2010 will inflate the cost of importing goods and services from South Africa,” said RenCap.
Zimbabwe currently imports most household goods from SA as the local industry is still struggling to meet demand.
Most companies’ capacity utilisation levels are low, with the production potential level averaging 47 percent. This is compounded with the use of old machinery and poor supply of utilities.
RenCap said two-thirds of Zimbabwe’s imports come from South Africa.
“Inputs of raw materials account for an estimated eight percent of total imports, and almost 20 percent 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, the report added.
The research firm noted that while local producers may use this as an opportunity to push their products in the market, the effect of a strong rand would have negative implications for manufacturers that depend on imported inputs.
Only producers that source raw materials locally would benefit.
The decline in domestic raw materials supplies in recent years has forced producers to import inputs from South Africa.
“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,” according to the report.
RenCap has projected that household consumption would increase in 2011 on the back of an expected wage hike for civil servants and an increase in remittances entering the country through more secure formal channels.
“The public sector wage bill will rise 40 percent in 2011. As the public sector employs an estimated 250 000 people, or half of the formally employed, this implies a significant boost in the average wage of formal workers.
“Higher incomes are expected to translate into an increase in consumption expenditure, which will benefit retailers and local producers of consumer goods,” noted the report.
RenCap has also projected a positive inflation outlook.
Non-food inflation is forecast to rise in 2011 on the back of higher oil price, which will push up fuel prices and transport costs.
Food inflation will peak during the first half of the year but would slow thereafter as the harvest begins.
However, the downside risks to inflation include a potential surge in global food prices.
“As Zimbabwe is now a net food importer, a strong increase in global food prices would put upward pressure on inflation.
“Wage increases might also compel some manufacturers to pass on the higher cost of production to consumers,” said RenCap.