Reward companies substituting imports

SINCE the adoption of the multiple currency regime, Zimbabwe has seen its trade deficit ballooning to a cumulative figure of close to $30 billion. This has become one of the stubborn causes of the liquidity crunch in Zimbabwe.

In order to build a case on why policy makers must reward companies substituting imports, I picked up trade statistics (imports) for 2015 because this was before the popular statutory instrument 64 was promulgated.

There were of course a number of statutory instruments (SIs) which were implemented before such as one covering cooking oil, tyres, pharmaceuticals and clothing. In 2015, Zimbabwe’s import bill was largely constituted by minerals, oils and distillation products amounting to $1,84 billion.

This was followed by machinery and equipment, motor vehicles, cereals, electricals, pharmaceuticals, plastics and fertilisers with imports value of $559 million, $460 million, $410 million, $403 million, $231 million, $203 million and $169 million, respectively. All these imports constitute 71 percent of our total imports in 2015 which is quite significant.

In addition to these imports, there are a number of imports which are coming in small numbers but when constituted together results in enormous figures.

For example, imports on pampers, toothpicks, agricultural produce such as onions, tomatoes, soya bean and mushroom to mention a few are quite disheartening.

In recent months, there has been a loud gospel to incentivise exports. In the same vein, there had been equally loud voices on prioritising foreign exchange to exporting companies on the premises that they generate foreign exchange.

On the contrary, there is dead silence on incentives and foreign exchange allocation to companies which are substituting imports.

Companies such as Nestle, Dairibord, Delta Beverages, Seed Co, cooking oil industry as a whole, etc have made significant investments which have reduced the import bill in specific products they produce.

Dairibord, for example, invested about $5 million into production of Mahewu.

This has reduced imports of Mahewu from Zambia. The same applies to investments made towards production of biscuits by Lobels and Bakers Inn have completely cut imports from Zambia.

The same applies to Nestle investments made into their plant and even cattle rearing. I can go on and on.

The rationale of giving equal support to import substituting companies is very clear.

These companies which are producing for the local market are saving foreign exchange which could have been wasted anyway thereby exerting pressure on foreign exchange. Now, because they are serving the local market, they must be given the same priority as exporters because their role on improving liquidity is the same as the one from exporters.

For avoidance of doubt, I am aware that the Reserve Bank of Zimbabwe has been prioritising local producers but I must admit that my observations, based on my interaction with companies, the prioritisation was biased to the ones which are producing basic commodities such as cooking oil yet other commodities are equally important because they are still in demand anyway.

The upcoming budget should consider offering tax breaks (on corporate tax) to companies which are making fresh investments and capacitating local suppliers such as farmers. There is a business case in offering these tax breaks as Government will recoup its money through other tax heads like value added tax (VAT).

In the large part of this year we have seen Zimbabwe Revenue Authority (Zimra) exceeding its tax target on the back of high performance of VAT and of course monitoring and audits. We can actually grow the fiscal space by domesticating unnecessary imports. Our companies must therefore be incentivised to support locally produced goods within their value chains.

It is refreshing to note that the Ministry of Industry and Commerce is building on gains from SI 64 and previous SIs by crafting local content policy which among other things will come up with policy measures and incentives aimed at supporting local production and rewarding those who are working in building capacities of suppliers in their respective value chains.

While the development of the local content is work in progress, the following measures must be undertaken: ◆ Reserve Bank of Zimbabwe must prioritise the foreign exchange to both exporters and companies which are substituting imports. There is need for a deliberate effort from the Reserve Bank of Zimbabwe to work with the Ministry of Industry and Commerce team on local content to share notes on companies which are actively cutting imports and prioritise them in foreign exchange allocation; ◆ The Ministry of Finance, in its upcoming budget, must come with tax incentives aimed at promoting local production. Tax breaks on corporate income is one of them; ◆ The ministry responsible for indigenisation must, in line with the President’s clarification of the indigenisation policy, amend the law to allow for indigenisation credits to companies supporting business linkages and small and medium enterprises development. ◆ There is need to ring fence the supply and pricing of utilities such as electricity and water to key industries which are involved in producing for exports and substituting imports. This will help in raising their competitiveness considering the fact that electricity alone is contributing about 30 percent in some cases to the cost of production. In this thrust, the ring fenced companies must receive subsidised tariffs. It is a worth cost as compared to funding defunct parastatals which are adding no value in this economy. Together we make Zimbabwe great!

Dr Mugano is an economic advisor, author and expert in trade and competitiveness. He is a Research Associate of Nelson Mandela Metropolitan University. Feedback: +263 772 541 209 or gmugano@gmail.com