According to economists and business executives, the demand for commodities and services has started to weaken due to the rising cost of living. The depreciation of the Zimbabwe dollar has eroded the buying power of many people, particularly those formally employed and earning local currency.
Economics professor Gift Mugano stated that disposable incomes have been significantly eroded by inflation, leaving consumers with little to spend. While 80% of transactions are now conducted in US dollars, there is not enough liquidity in that currency to stimulate demand. Mugano believes that the majority of workers in the formal and informal sectors are not earning enough to stimulate demand. He said last week:
It’s not about dollarisation or the US dollar dominance, but it is about liquidity, which is quite small.
That is why we have seen prices in the US dollars going down because there is no money to stimulate demand.
Buying power has been eroded and the US dollar incomes have been typically quite low.
The Confederation of Zimbabwe Industries (CZI) president, Kurai Matsheza, stated that companies are beginning to witness a massive decline in aggregate demand. He said:
Certainly until and unless the pay adjustments match the depreciation (of the currency), aggregate demand naturally diminishes and more importantly, would the employers be able to match the salaries to the levels of (currency) depreciation? I don’t think so.
What we are seeing in our businesses is the coming down of demand; it is drying up even the order quantities have also come down.
However, the chief executive of the Zimbabwe National Chamber of Commerce (ZNCC), Christopher Mugaga, believes that aggregate demand is not determined by incomes and salaries from the formal sector because they are insignificant and compensated by artificial demand. He said:
Aggregate demand is not determined by incomes and salaries from the formal sector because they are very insignificant. That insignificant portion is compensated by artificial demand because there are already fears of shortages of products.
According to some analysts, the decline in order quantities for manufacturers may not be due to weakening demand, but rather changes in trading terms. Schweppes managing director, Charles Msipa said companies are now insisting on upfront Zimbabwe dollar payments, which has become difficult for some. Msipa added that it is still too early to determine the demand patterns due to these changes, particularly in the formal sector, which predominantly uses the Zimbabwe dollar. Msipa stated that it is hard to know if the uptake of the product is low when retailers do not have their products on their shelves.
Last month, the Finance and Economic Development Minister, Prof Mthuli Ncube, announced policy measures to stabilize the economy. However, the domestic currency has depreciated by roughly 393% against the US dollar.
While some suggest dollarisation may help, Reserve Bank of Zimbabwe Governor, Dr John Mangudya, stated that full dollarisation of the economy would lead to weakening demand for goods and services. He said the rate at which US dollars go out is faster than the rate at which they come in, and dollarisation would lead to companies scaling down and job losses.