Supply side intervention key for Zimbabwean Industries

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Victor Bhoroma

The local industry has been operating below par in the last 20 years. Various policies by the government have failed to re-industrialize the economy with the sector’s contribution to GDP falling below 13% in 2017 ($3.4 billion after data rebasing by Treasury).

At its peak, the manufacturing sector used to contribute 42% to the country’s export earnings in 1998. The surge in manufacturing sector capacity utilization experienced in 2016 after the passing of import restrictions (Statutory Instrument 64 of 2016) and implementation of the RBZ Export incentives clearly demonstrate that the local industry needs interventionist policies to stimulate production. Zimbabwe’s manufacturing industry has strong backward and forward linkages with other sectors of the economy such as agriculture and mining. It is fair to point that funding for command agriculture and artisanal mining has a net effect on manufacturing, however policies to stimulate these three key sectors of our economy have not been synchronized.

The major constraints to optimal production in the industry include shortage of foreign currency to import essential raw materials, lack of capital to retool, taxation, obsolete machinery, stiff competition from imports and the high cost of doing business in the market. The high cost of doing business takes into account the cost of electricity, water and locally produced inputs and services. Supply side interventions are economic policies aimed at making industries operate more efficiently and contribute more to GDP growth rate. The government needs to craft an industrial policy which takes into consideration the following:

Reduction in indirect taxes

Taxation plays a fundamental role in managing the cost of doing business in an economy and giving incentives to potential investors in the industry. Tax compliance is less than 40% in Zimbabwe, partly because of the steep indirect taxes levied on the industry. High levels of taxation encourage tax evasion and business informalisation. A reduction in indirect taxes such as customs duty levied on raw material imports, value added tax (VAT) and excise duties on fuel can have positive ripple effects on consumers through reduction in retail prices. Export competitiveness of Zimbabwean manufactured products will also improve significantly in the regional market. The government should offer tax rebates or indirect tax reductions for local suppliers of our major imports such as steel products, cereals, foodstuffs, plastics, fertilizers and chemicals. This will simply offset our import bill on those imports thereby helping manage our trade deficit in a sustainable manner. Never mind the resultant direct and indirect employment created for downstream producers.

 

Duty free importation of capital equipment

One of the major constraints faced across the industry is antiquated machinery which limits production capacity and chokes in more in terms of maintenance costs. In order to reindustrialize, improve technological transfer and expedite value addition of local produce, the government needs to facilitate for the importation of industrial machinery duty free. Such a policy is more of a must for a developing country like Zimbabwe. The Confederation of Zimbabwe Industries (CZI) and local banks can support this initiative with key input on the modalities of such a policy. Besides improving production capacity, new technology in the industry lowers the cost of production by a huge margin.

Long term credit lines

The Confederation of Zimbabwe Industries (CZI) recently indicated that the manufacturing sector requires about $2 billion in capital funding for optimum operations. After years of deindustrialization, funding is critical if the country is to achieve its 2030 vision. Half of the country’s import bill of $5 billion in 2017 is composed of products that used to be manufactured in Zimbabwe but are now being imported from South Africa, Zambia, Malawi and China. As stated earlier, the government should identify the struggling suppliers of our major imported products and help guarantee long term credit lines. This will be a welcome move for producers in steel and foundry, industrial chemicals, packaging and fertilizer who struggle to meet local demand year in year out.

Export incentives

RBZ Export Incentives are working a double magic for the local economy through improving foreign currency earnings and production capacity. The government should widen these incentives to include export facilitation for local manufacturers in identified markets.

ZIMTRADE has key information on such exporters who are struggling to break into foreign markets due to lack of funds and credit insurance. Other incentives can be tax exemptions on profits realized by exporters. This policy cushions the government as it does not result in any financial commitment to the exporter and forces the exporter to report accurate export receipts since the tax exemptions are tied to profits realized.

The positive effects of industry biased supply side interventions to the economy cannot be overemphasized. Clear policies to re-industrialize the industry represent a sustainable formula to curtailing the recurring trade deficit that befalls Zimbabwe.  The gains realized in subsidizing agriculture and mining will only make economic sense if produce from these two sectors is processed by the local industry than being exported in raw form then be imported in finished state by various consumers. Value addition for Zimbabwean produce should be done locally in order to manage the country’s import bill.

Victor Bhoroma is business analyst with expertise in strategic marketing and business management aspects. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or Skype: victor.bhoroma1.