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Financial impact of Ukraine war on Zim

The war is not only being fought on the traditional battlefield with the traditional weapons but is also an economic one. We have the response by Western countries, wherein they are making use of sanctions and a tool to inflict economic damage.

By Owen Mavengere

ZIMBABWE is several thousand kilometres away from Ukraine or Russia, and thus we are supposed to be safe from any of the effects of the war.

Unfortunately, because of globalisation, we are not. In fact, this war and the subsequent frenzy around it, which is getting similar levels of attention that the Covid-19 pandemic received, will have effects felt over the next several decades.

In my view, the impact of this war can be split into two broad categories, that is geopolitics and economics. Zimbabwe is not going to be immune to the impending changes as the world politics and economics is essentially redrawn.

The war is not only being fought on the traditional battlefield with the traditional weapons but is also an economic one. We have the response by Western countries, wherein they are making use of sanctions and a tool to inflict economic damage.

This simply means that the global economy is going to be altered significantly. Given our reliance as a global world on technology one would not be surprised if the war goes into cyber-space at a larger scale.

Due to globalisation, none of these actions can be taken without filtering through to us in Zimbabwe. One could argue that the extent might not be as significant to us as it will be to those in Europe, but given that we are in a precarious position, trying to rebuild our economy any slight negativity can have an amplified effect.

Globalisation has been defined by Investopedia, as the spread of products, technology, information, and jobs across national borders and cultures. In economic terms, it describes an interdependence of nations around the globe fostered through free trade.

Globalisation accelerated over the last two centuries due to technological advances in transport and communications. After the pandemic adoption of technologies around communications grew exponentially so I believe that since 2019 the international borders were further blurred, from an economics and business perspective.

Coming back to the war and how it is going to affect us – the first, most immediate and likely most painful is going to be oil price. We will also see disruptions to supply chain, commodity prices movements, difficulty in accessing financing, cyber-space disturbances and so on.

Oil price

I find the oil price to be a rather sensitive index. The world’s dependency on oil for energy and other products might be the reason why any event, even if it seems isolated in geographical terms, will have a huge impact on the price of crude oil.

It did not take long for the price to go beyond US$100 per barrel as it is currently hovering at around the US$110 mark. This will translate to higher fuel costs for businesses and individuals alike.

A significant portion of the pump prices that we pay is taxes and duties, so this creates a serious challenge. Either the pump prices go up or taxes are reduced to offset increases on the international markets.

Both options are not good for the country as they will cost us something indirectly. Consumers will face higher prices for goods across the board or the government is less funded for its critical activities.

As a nation we have a battle against inflation but we are about to start importing the inflation through fuel. In the short term, there is little that can be done to reduce our dependence on imported fuel, but in the long term energy self-sufficiency is a key requirement for us as a nation to guard against such instances.

Organisation heads need to start making adjustments to cater for the likely impact in order to protect their consumers and themselves.

Leaders of businesses should have their numbers and processes revisited to further squeeze out additional efficiencies to offset the unbudgeted increase in fuel price should it come.

 Commodity prices

Related to the prices of key commodities on the international markets, Zimbabwe is an exporter of various raw materials, chief among them our minerals.

Examples include ferrochrome, gold, the platinum group of metals and so on. In this arena we are a price taker as the prices are determined elsewhere.

This point on predicting or influencing prices is a topic for another day. Back to the issue, the changes on the global markets will impact us either negatively or positively.

Some commodities will likely see sharp increases in their prices. This should hopefully offset, in part, the negative impacts of high oil prices.

Gold is a key example which often sees significant increases in prices whenever there is uncertainty. As mentioned, because we are price-takers, we cannot know with certainty or influence what the prices will look like in the future, so it will be important to prepare for the period when the prices slump.

In a discussion with one of the country’s leading exporters, the chief executive, said in their business when the prices are in their favour they prepare for the inevitable rainy day. It is therefore important for such organisations to make hay while the sun shines.

Supply chain disruptions

Disruptions to supply chains are also a serious possibility. As a global village that trades with each other quite significantly, any challenges in one part of the world will be felt everywhere.

This is similar to the blockage that occurred in the Suez Canal not very long ago. Business leaders need to look at their supply chains focussing on where they source their raw materials and where their customers are.

This will also entail peeling beyond the first layer, that is to say, who supplies your supplier and who is your customer’s customer. This would be important to establish if there will be a possible negative impact on one’s business.

Depending on the specifics the mitigation that will be required as to be informed by what is likely to be affected within the value chain to which an organisation belongs to. If possible alternatives will need to be sourced in the intervening period.

 Access to financing

Since this war is also taking an economic turn through sanctions and the banning of selected banks from swift it is likely that our ability to access funding globally will be impacted.

As the war and the measures being taken evolve and take a life of their own there may be other consequences. The finance landscape will be altered and this will not spare Zimbabwe. Business leaders need to monitor this closely and prepare as well.

 Final thoughts

Before I conclude, I want to mention that the war may also likely turn to the cyber-space world. We rely on global systems as a nation as well hence we may be affected. This will require close monitoring especially with the increased adoption of cloud computing.

Business leaders need to stay abreast with the developments and reactions by the opposing parties.

Each action taken being taken many thousands of kilometres from us will need to be analysed in order to get an understanding of the likely impact in order to strategise on the response.

  • Mavengere is the technical director at the Institute of Chartered Accountants of Zimbabwe (Icaz), which is the largest and longest standing PAO in Zimbabwe, having been established on 11 January 1918, and is a body corporate incorporated under the Chartered Accountants Act [Chapter 27:02]. Icaz provides leadership on the development, promotion, and improvement of the accountancy profession focusing in the areas of accounting education, assurance, good governance practices and leadership and organizational excellence. — technical@icaz.org.zw or twitter: @OwenMavengere.