Bulawayo as a leather industry SEZ: Key imperatives going forward — Part 2
THIS is a continuation of my article from last week where I looked at the key policy imperatives for the development of Bulawayo as a leather industry Special Economic Zone (SEZ). In spite of its small economic size, low endowment of natural resources, and remoteness from world markets, Mauritius has transformed itself from a poor sugar economy into one of the most successful economies in Africa in recent decades, largely through reliance on trade-led development. Real Gross Domestic Product (GDP) growth averaged more than five percent between 1970 and 2009, while GDP per capita has increased more than tenfold over the same period and therefore if such small countries can achieve miraculous development for their people then there is no reason why such a model cannot be adopted in Zimbabwe.
Leather and Manufacturing Industry during the Crisis period 1997-2008
In the decade 2000-2010, Zimbabwe experienced a general economic downfall which also affected the leather industry and the livestock sector. Gross domestic product contracted by more than 40 percent between 2000 and 2008, and the manufacturing sector lost almost 50 percent of its output over the 10-year period. Until 2000, Zimbabwe produced 17 million pairs of shoes, whereas in 2011 only one million were made. In 2001, Zimbabwe exported nearly US$30 million worth of meat, whereas in 2010 over $30 million was imported.
In 2011, the cattle population stood at 5,1 million heads, with smallholder farmers owning about 90 percent. Off take rate was at five percent, which corresponded to about 270 000 animals killed and 388 000 hides being availed in the market (including hides from imported cattle and the informal sector). These hides represent a potential business of at least $7 million in their raw form, which could be tripled if they were all value added to finished goods within Zimbabwe. Foreign Currency Auction System At the height of the foreign exchange crisis in December 2003, the Reserve Bank of Zimbabwe (RBZ) introduced a Dutch foreign exchange auction system. The managed auction was intended to be a strategic measure to stabilise the foreign exchange market and control the parallel market. All foreign currency accounts held with commercial banks were migrated to the RBZ, and all foreign exchange transactions remained subject to RBZ approval. The launch of the foreign currency auction effected a 74 percent devaluation of the official exchange rate, from Z$824 to Z$3 218 per US$ at the first auction in January 2004.
A notable short-term impact of the auction system was the immediate reduction in the parallel market premium. The parallel market rate appreciated by 40 percent from Z$6 500 to Z$3 000 per US dollar. In addition, the transfer of foreign currency accounts to the RBZ largely curtailed the quasi-official participation of financial institutions in the parallel market. Nonetheless, the market remained very active but now operated underground. In terms of exchange rate determination, the auction system turned out to be heavily controlled. Approval of bids and allocation of foreign exchange at the auction was subject to the RBZ priority list and Exchange Control approval.
An evaluation of the auction system shows that from the Auction 1, the amount of bids sharply increased from US$0,47 million to a peak of US$267 million on auction number 133. On the other hand, the amount allotted only increased from US$0,47 million to US$12,5 million by auction number 171. By auction number 108, the percentage of rejected bids averaged over 97 percent, implying the acceptance of a paltry three percent of bids. After failing to cope with excessive demand, the auction system was abandoned in October 2005. The auction system had favoured such ‘‘national interest’’ related bids as fuel importation at a time when the country had a fuel crisis, medical supplies and drugs and essential chemicals for water treatment and this left the manufacturing sector to seek for foreign currency on the parallel market where punitive rates prevailed and most companies simply went into “care and maintenance” mode as they could not produce profitably anymore and most consumers of shoes resorted to Chinese imports which were cheaper and less durable than locally made products.
The Leather Manufacturing Sector Post Crisis Period, 2009-2014
In 2011, Zimbabwe produced about 1 012 207 pairs of leather shoes with local finished leather. Of these, 875 000 pairs were produced in Gweru and Bulawayo and 111 207 pairs in Harare area. About 16 percent of Zimbabwe’s leather shoes were exported (162 000 pairs). The remaining 84 percent (850 207 pairs) were sold in the local market. Retailers imported about 250 000 pairs of leather shoes, which added to those consumed in the local market, bringing the total amount of leather shoes available in Zimbabwe to 1 262 207 pairs. Total shoe consumption was six million pairs in 2011, of which 79 percent was accounted by non-leather shoes (synthetic, plastic, rubber, etc). In 2011, total revenue generated by the leather industry was estimated at approximately US$82,2 million and industry’s contribution or value addition at US$31,7million. The largest contributions to total sales and margin came from shoe retailing and shoe manufacturing, the two levels of the value chain where there is more value addition. About 1 168 companies were as of 2012 estimated to actively work in the leather value chain, providing employment to approximately 5 610 people.
In 2009, with the introduction of the multi-foreign currency system, the economy started to recover and capacity utilisation increased across all sectors. At present, Zimbabwe is a net importer of footwear from South Africa and other cheap imports shoes flood the market. Only six tanneries were operational in 2012 at no more than 30 percent capacity and 19 of LAIFEZ members have closed down. Zimbabwean industries continue to face many challenges as production costs are very high with low productivity making it totally uncompetitive on the international market.
1 The Government has to come up with an overall long term strategy for the leather industry value chain with clear transition mechanisms, precise goals, practical objectives, realistic deliverables and time lines. A blunt and honest opinion is that the entire value chain has been characterised by policy, institutional, regulatory and marketing failures at various points of history. Economic Structural Adjustment Programme (Esap) came in a policy void. There was no fall-back position in case Esap did harm to the leather industry. The policy’s response to the new World Trade Organisation (WTO) liberalised trade rules was muted; neither did Zimbabwe take concrete steps to prepare the leather industry for life after the Uruguay Round of trade negotiations (1986/1994). While the Indigenisation and Empowerment Act is generally clear in legal terms, there is a crying need to explain how it will be executed in practice in the leather industry. The silence of Government leads to speculation, hearsay and falsehoods to dominate the “silent” debate which discourages further investment in the industry by both locals and foreigners. Policy clarity is therefore needed if Bulawayo is to be revived as a leather industry SEZ.
2 Zimbabwe has to pursue a liberal investment regime and offer incentives to attract foreign direct investment (FDI) and these will include a reduction in corporate tax from the current over 25 percent to levels of about 10 percent or lower if it is to be more attractive than other African countries. Offsetting the burdens of exporting leather industry players with tariff-free access for productive inputs and with tax incentive subsidies, and relaxed labor market regulations, in the export sector is necessary if economic development is to be a reality in this country.
3 Key components of the SEZ should include protective import duties and quotas for infant leather industries, suspension of import duties on materials and equipment for industrial use and not locally available, rebates of import duties on other raw materials and components for specified industries, duty drawback schemes, and favourable long-term loans.
4 The Government has a duty and obligation to create a conducive and enabling economic and business climate, as this in turn will improve competitiveness. In particular, there is need for certainty and predictability, besides the provision of an enabling policy framework that encourages and facilitates trade, investment, entrepreneurship, technology uptake in the leather value chain which is rooted in regional and continental integration initiatives of the Common Market for East and Southern Africa (Comesa), Southern Africa Development Community (Sadc) and the AU. Government has to enforce existing tariff measures whose lack of enforcement has led to the demise of the industry as a result of smuggling of imports, and corruption. Legislation is in place already but needs to be enforced to curb smuggling and abuse of the Rules of Origin (RoO) provisions contained in Trade Protocols.
5 Government needs to ensure that it also promotes a domestic market for the local manufacturers subject to price and quality considerations. This is a domestic market access and niche creation strategy. Government should make it compulsory for the public sector to source their leather products like shoes, boots, bags, handbags and belts (for the police, army, prisons, hospitals and parastatals) from local manufacturers. Government through its agencies should champion domestic consumption by instituting a ‘‘ 100 percent Zimbabwean Leather’’ for its leather requirements. Government should market and lead the cause to ‘‘Buy Zimbabwean Leather’’, with senior Government officials being the ‘‘Brand Ambassadors’’.
Butler Tambo is a Policy Analyst who works for the Centre for Public Engagement and can be contacted on butlertambo@gmail.com or +263776607524.