LIST OF ACRONYMS AND ABBREVIATIONS
CHAPTER 3: SMEs IN THE ZIMBABWEAN CONTEXT
3.5 THE DEVELOPMENT OF SMES IN ZIMBABWE
Prior to the independence of Zimbabwe in 1980, the economy was highly regulated, and this was the type of economy inherited by the new black government when it came to power, led by Robert Mugabe (AfDB Group, 1997). The production, distribution, and marketing of commodities were mainly dominated by large companies (Mhazo et al., 2006). Though SMEs existed, there were very few of them, and their impact was insignificant (AfDB, 1997;
Chipangura & Kaseke, 2012). This was because in the first decade of independence, government policies did not support SME development, but rather the development of co- operatives (Kapoor et al., 1997; Chirisa et al., 2012). According to the AfDB (1997), as the Zimbabwean economy began to grow, the negative impact of these regulations on production became glaringly obvious. In 1990 Zimbabwe had a balance of payment deficit of US$257 million (AfDB, 2007) while its budget deficit exceeded 10 % of the GDP (Zhou, 2000). It was against this background that it became necessary to do away with the protectionist and socialist policies that were retarding the performance of the economy (Kanyenze et al., 2011; Matunhu & Mago, 2013). Thus, the government introduced the ESAP in 1991, with the support of the IMF and the World Bank.
The ESAP was an economic policy that the World Bank and the IMF suggested and administered to countries experiencing economic problems and who were in a debt crisis.
Zimbabwe introduced the economic reform programme with the aim of reducing its budget deficit, creating employment, improving the standard of living of its people, and promoting industrial development (Kanyenze et al., 2011; Hawkins & Ndhlela, 2009, cited in Gumbe &
Chaneta, 2014). This was to be achieved through removing government subsidies on social services, trade liberalisation, reducing government expenditure, removing price controls, and privatising and commercialising state enterprises (GoZ, 1991; Madzivire, 2011; Matunhu &
Mago, 2013; Zhou & Zvoushe, 2013).
It was the ESAP that played a significant role in the development of SMEs in Zimbabwe. The economic climate created by the ESAP made the policy makers realise the importance of SMEs in economic growth and the provision of employment (Mhazo et al., 2012; Jongwe,
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2013). Therefore, policies and strategies to support the development of SMEs needed to be developed and implemented.
The economic decline in African countries before the end of the twentieth century forced many governments to implement economic reforms (Ngwenya & Ndlovu, 2003). Poor economic policies, mismanagement of the economy, corruption, and political instability were some of the reasons for economic decline. As a result, poverty, unemployment, and poor economic growth became evident (Ngwenya & Ndlovu, 2003). The socialist policies that had been implemented by the Zimbabwean government since 1980 could not promote economic growth and improve the well-being of the population (Matunhu & Mago, 2013). The socio- economic and political landscape played a critical role in the establishment of SMEs in Zimbabwe (Ndiweni & Verhoeven, 2013). The ESAP was rolled out in 1991, and was aimed at dealing with the socio-economic problems the country was facing (Ngwenya & Ndlovu, 2003; Malaba, 2005). Therefore, the ESAP aimed to improve the standard of living of the people of Zimbabwe through rapid and sustainable economic growth.
However, the ESAP was not successful, as it resulted in the loss of jobs in both the public and private sectors (Toriro, 2009; Murisa, 2010; Jongwe, 2011, cited in Jongwe, 2013; Gumbe &
Chaneta, 2014), and the GDP declined (Madzivire, 2011). In 1992, a year after the implementation of the economic reform programme, the GDP declined by 11 % (Zeilig, 2002). Zeilig (2002) further notes that between 1991 and 1993 more than 2 000 jobs were lost. In the public sector, approximately 2 500 additional jobs were lost in the public service (Murisa, 2004, cited in Murisa, 2010). In 1992 unemployment stood at approximately 22 %, and by the end of 1996 the economy had declined further, as evidenced by the unemployment figure of 35 % (AfDB Group, 1997).
The manufacturing sector was hit hard and its performance declined, leading to the closure of six companies and the further loss of jobs (Nkala, 2012, cited in Mushanyuri, 2014).
Companies such as National Blankets, Cotton Printers, and Merlin, which used to employ about 2 000 workers each, reduced their workforce to approximately 100 (NewsDay Zimbabwe, 11 December 2012). The percentage of the population living in poverty increased from 62 % in 1995 to 85 % in 2001 (Ngwenya & Ndlovu, 2003). Some large multi-national companies, as well as large local companies, were forced by the harsh economic circumstances to scale down their production (Kadenge, 2009, cited in Maseko, 2014) while others had to close down entirely, leading to massive retrenchments (Matutu, 2014). For example, nearly 400 companies closed in 2000 (AfDB Group, 1997). The shrinking of the formal job market and the fact that people were becoming poorer, created the conditions for the expansion of the SME sector (RBZ, 2014a). Zeilig (2002) and the IES (2010) rightly
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observe that employment collapsed to such an extent that university and technical college graduates could not get employment and lost hope of getting any. This indicates that the ESAP had failed to deliver as expected. The ESAP could not address the macroeconomic factors contributing to economic instability, because inflation and interest rates were rising while exchange rates and the real GDP were declining (ZimStat, 2013b). In 1994/5, the situation became so dire that food riots occurred in Harare due to the rising cost of food (IES, 2010).
A plethora of factors explain the failure of the ESAP in Zimbabwe. The ESAP was an inappropriate policy instrument for Africa, and for Zimbabwe in particular (Carmody &
Taylor, 2003; Tamukamoyo, 2009). Saunders (1996) claims that it was imposed by the IMF and the World Bank without consideration for the social and economic realities of Zimbabwe.
It placed too much emphasis on the maximisation of profits without paying particular attention to issues such as employment creation, economic expansion, and improving the standard of living of the people (Saunders, 1996). Social services such as health care became prohibitively expensive for the majority of the population (Matutu, 2014). This explains why the socio-economic situation in Zimbabwe deteriorated after the introduction of the ESAP.
The situation was further exacerbated by the severe drought of the early 1990s. After two consecutive dry seasons, the GDP decreased by more than 7.5 %, and inflation ballooned to 30 % (Carmody & Taylor, 2003).
The above scenario created suitable conditions for the growth of SMEs in Zimbabwe, as people had to find other ways to meet their everyday needs (Muhande & Matonhodze, 2008;
Marunda & Marunda, 2014; RBZ, 2013). SMEs were established for the purpose of supplementing household income, of creating income for people who had been retrenched during the closure of companies, and of providing employment for graduates from HEIs who could not be absorbed into the formal sector (Ngwenya & Ndlovu, 2003; Chipangura &
Kaseke, 2012). This is consistent with Mhazo et al. (2012), who state that in the mid-1990s there was rapid growth of both formal and informal small and medium-scale enterprises.
Credit at this point was given to the ESAP, because the number of SMEs in Zimbabwe grew after its introduction, representing an annual growth turnover of 28 % between 1991 and 1995 (Knight, 1996; Chipangura & Kaseke, 2012).It became clear that the ESAP had failed to achieve its objectives and that the economic situation had become even worse, forcing people to turn to SMEs for survival. This explains why there was an increase in the number of SMEs in Zimbabwe. Thus, after the introduction of the ESAP, SMEs became the major source of livelihood for 80 % of the Zimbabwean population (RBZ, 2006a; Muhande & Matonhodze, 2008; Chandaengerwa, 2014).
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The macroeconomic environment, after the introduction of the ESAP, was conducive to the growth and development of SMEs and not large-scale companies (Muhande & Matonhodze, 2008; Chipangura & Kaseke, 2012). Thus, the number of SMEs increased, leading to the creation of employment while large companies were scaling-down operations (Mhazo et al., 2012; Chipangura & Kaseke, 2012; Manuere et al., 2012; Marunda & Marunda, 2014). The loss of business by large companies resulted in retrenchments and even the closure of factories, requiring people to focus their attention on SMEs for survival (Taru & Basure, n.d.;
Mhazo et al., 2012; Chipangura & Kaseke, 2012; Moyo, 2010, cited in Mbizi et al., 2013;
Tawodzera, 2013; Marunda & Marunda, 2014). Therefore, in the past 10–15 years large companies have disappeared, giving way to the emergence of SMEs (Zimbabwe Ministry of Industry and Commerce (ZMIC), 2014b). Ehinomen and Adeleke (2012) observe that the focus on SMEs was predicated on their contribution to economic development and their provision of employment.
The devaluation of the Zimbabwean dollar, deregulation of the economy, liberalisation of trade, removal of government subsidies, the reduction of central government expenditure, the removal of price controls, and the privatisation of public enterprises negatively affected the economy to such an extent that many Zimbabweans turned to SMEs for survival (Mhazo et al., 2012; Sachikonye, 2007, cited in Muhande & Matonhodze, 2008; Jongwe, 2013; Moyo, 2010, cited in Mbizi et al., 2013; Marunda & Marunda, 2014). The Zimbabwean government found it extremely difficult to reduce its budget deficit and accomplish its goals of implementing the ESAP. Thus, the ESAP failed to deliver what was expected and alternative solutions were needed to bail out Zimbabweans from the economic quagmire. The government therefore shifted its attention towards the SME sector for solutions to unemployment, suffering, and poverty.
The consequences of the ESAP contributed greatly to the changes in government perceptions of the SME sector (Kapoor et al., 1997, cited in Zindiye et al., 2012). Kapoor et al. (1997) observe that the SME sector was increasingly viewed as an important engine for employment creation and economic growth. This focus was necessitated by the increasing awareness within the policy making community that large industrial projects were less likely to generate the requisite employment opportunities. This was partly because of the high capital-intensity input in the sector. In the 1996 Parliamentary Budget Speech, a commitment was made by the GoZ to the development of the SME sector (AfDB Group, 1997).
The development of SMEs is also partly attributed to the effects of the HIV/Aids pandemic.
Many people, especially women and children, joined the SME sector after the death of the household head, the father, who was the breadwinner (Bhalla et al., 1999, cited in Chipangura
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& Kaseke, 2012). Women and children were exposed to so much suffering that they were left with no choice but to turn to the informal sector for employment or to open small businesses for survival.
It was assumed that government support for SMEs would lead to the indigenisation of the economy and employment creation in every part of the country (Kapoor et al., 1997;
Ehinomen & Adeleke, 2012). The policies developed at this stage were a clear sign of the government’s commitment to developing the SME sector. These policies and strategies were aimed at dealing with the multiplicity of challenges confronting SMEs, which included inadequate finance, poor management skills, unsuitable locations, punitive rules and regulations, poor economic performance, and other challenges such as inappropriate and unsupportive infrastructure. The policy makers responded by creating organisations such as the Small Enterprise Development Corporation (SEDCO), the Venture Capital Company of Zimbabwe (VCCZ), and the Credit Guarantee Company of Zimbabwe (CGCZ) in an effort to assist SMEs so that they would grow. However, the impact of these efforts was ultimately insignificant because the institutions were not co-ordinated to render effective support to the SMEs.