The main narrative surrounding the economic impact of Covid-19 has been negative given the projected cost to the global economy. At best, the IMF projects a 3 percent contraction in global output, WTO a 13 percent decline in global trade, and ILO a loss in working hours equivalent to 195 million full-time jobs.
At home, the IMF’s projected cost to Zambia’s economy is even greater – a contraction in economic output of 3.5 percent is anticipated which entails an economic recession. Notwithstanding this dire situation, a positive narrative to Covid-19 is emerging that could just be a silver lining to this dark cloud, particularly for local suppliers in Zambia that previously had difficulty accessing supermarkets. This opportunity largely emanates from disruptions to the usual global and regional supply chains as countries cut back on production and exports of goods due to lockdowns, social distancing, travel bans and tighter border controls. Inadvertently, this is providing Zambian firms some degree of artificial temporary protection from import competition which could potentially open up greater domestic market access.
The Finance Minister’s recent statement on further measures to mitigate the impact of Covid-19 on Zambia’s economy identifies this outstanding opportunity for greater local supplier participation in supermarket value chains and import substitution. Consequently, a Taskforce has been established by the Government to ensure that more Zambian products are stocked on the shelves of supermarkets.
We consider the emphasis on increasing local content to be a positive development particularly if the necessary conditions for market access such as quality and quantity are met by local suppliers. Hence, the private sector should aggressively seize this opportunity and Government should support local firms build supplier capabilities that can gradually start to displace imports. A number of issues raised on this very subject in ZIPAR’s 2017 study titled ‘The Expansion of Regional Supermarket Chains: Implications for Local Suppliers in Zambia’ may require consideration. ZIPAR argues that the coming of foreign supermarket chain stores provides more than just a convenient one-stop-shop for bread, butter and other household consumables. A broader opportunity exists for stimulating increased agro-production, manufacturing, product upgrading and indirect employment creation through the integration of local suppliers in supermarket value chains.
Although some level of local participation in supermarket chains has been evident over the years, we found barriers to entry that have limited full and effective participation of local suppliers and the potential for industrial growth and job creation. We isolated the following issues albeit not exhaustively, that were found to be prohibitive factors for local firms not supplying supermarkets and to a lesser extent, firms supplying supermarkets. These include: the payment period for goods supplied purported to be protracted; weak supplier capabilities exacerbated by the lack of affordable finance to upgrade production; import competition; and supermarkets’ buyer power. While all these issues require equal consideration, we dwell on delayed payments because quick wins can be gained here.
Within the private sector, little attention has been devoted to supplier payment terms imposed by supermarkets and other private businesses that could be posing liquidity and growth constraints particularly for MSMEs. ZIPAR found that local suppliers are often subjected to long payment terms at best 30 days after invoicing, and at worst up to 90 days. This not only affects the ability of local firms to effectively and reliably supply supermarkets, but also constrains their growth prospects and ability to venture into other value adding activities and thus compete favourably with similar products from the region.
The logic is simple. To sustain operational activities required to participate in supermarket value chains, firms require working capital to invest back into the business, acquire inventory and ensure continuous supply of goods and services. Additionally, for local firms to grow, particularly small businesses with limited affordable financing options, the majority of firms have to finance investments using internally generated revenues and/or equity. As such, supermarkets’ payment terms with local suppliers may have immeasurable effects on the potential for micro and small enterprises to expand their activities, absorb more labour and upgrade their production processes.
So how do we ease this cash flow problem that is likely to be exacerbated by Covid-19 and ensure effective participation of local suppliers in supermarket and other value chains? Well, we could enact late payment legislation. In 1998, the UK prescribed legal measures aimed at combating late payment in business to business transactions which later extended to the EU. Essentially, buyers are required to pay for goods and services within 60 days at most unless otherwise explicitly agreed, and to pay interest on late payments.
Alternatively, to preserve good supplier-buyer relations between supermarkets and local suppliers, we could encourage a voluntary ‘prompt payment code’ that promotes fair and transparent contractual terms and curtails abuse of bargaining power. But for local suppliers that still need to borrow to bridge the working capital financing gap, the Bank of Zambia K10 billion Targeted Medium-Term Refinancing Facility should be leveraged for a dedicated and more affordable Supplier Credit Line. This amongst other key issues aforementioned require consideration. And plausibly, further empirical research on for instance, the total number and spread of local suppliers in Zambia and their capacity constraints.
By: Mwanda Phiri and Claudia Pollen
The authors are researchers at the Zambia Institute for Policy Analysis and Research (ZIPAR). For details contact: The Executive Director, ZIPAR, MNDP Complex, Cnr John Mbita & Nationalist Roads, P.O. Box 50782, Lusaka. Telephone: +260 211 252559. Email: email@example.com