Restoring customs duty will not increase cost of living

THE restoration of customs duty on a modest range of essential consumer goods should have zero effect on the cost of living for most people since Zimbabwean manufacturers and packers have for some time been able to supply the markets at below the landed cost of potential imports.

This was done in May last year when Minister of Finance, Economic Development and Investment Promotion Professor Mthuli Ncube modified his customs and excise regulations, a frequent occurrence when you look at the amendment numbers, to allow a round dozen essential consumer goods to be imported duty free, at least in the smaller and medium size packs that consumers buy.

This was the peak of what was described as “price madness, when prices in Zimbabwe dollars were rocketing and even prices in US dollars were being shoved up sharply as suppliers engaged in manipulations.

Shortages were appearing as a group of local suppliers either withheld supplies from the market, or worked behind the scenes to deliver the goods to those who operated in a total US dollar environment.

Many tricks were used. A common one was forward pricing, whereby a supplier would do some over-simple sums to figure out the Zimbabwe dollar price in a month’s time, simply by extending the exponential curve on a graph, and set that price.

This accelerated the decline in value of the local currency and was frequently not based on fact, but on a worse case reading of a graph along with the assumption that accelerating trends would continue.

Some were slightly more sophisticated. They pretended they were using the US dollar price, which should have been stable, and converting at the prevailing rate of exchange.

However, they wanted to use the black-market rate, which was variable since the street dealers all had difference prices. So the suppliers would convert their US dollar price to Zimbabwe dollars at the highest black-market rate they could find, then convert back to US dollars at the official rate and so set a higher US dollar price that took into account the black-market premium. The selling price was, in effect, set at the highest black market rate.

That particular fiddle has been applied frequently in more recent times as can be seen in supermarkets that quote in US dollars on their shelf labels and when those prices are compared to the prices in the pure US dollar tuckshops.

The most complex price machinations were to combine both approaches of simplistic forecasts of the two exchange rates along with the double conversion in and out of US dollar prices.

As things stabilised that left some manufacturers, and one multinational in particular, with some very expensive products on the shelves that no one in their right mind was buying.

Shortages started appearing, and in some products were severe. As the products either used Zimbabwean raw materials, or imported high priority raw materials that the then retail foreign currency auctions provided the necessary foreign funds, this was difficult to understand.

The general suspicion was that a large fraction of the goods were being moved through the informal sector, rather than the formal and licenced retail shops and supermarkets.

As part of a whole host of reforms the Government, via the Finance Ministry, developed and implemented to squash the black market and restore a degree of order, this time based on applying market forces rather than using fiat powers that may or may not have reflected reality, was the opening up of imports both through removing the need for specific licences and dropping the customs duties, which included that VAT component charged at the border. The objective was primarily to ensure that the necessary consumer goods were actually available, but a very useful by-product was to put a limit on the US dollar price of those goods, including the ones manufactured or packed in Zimbabwe.

That limit was the wholesale price in the country of origin, plus the cost of the transport which was higher than transport costs for Zimbabwean goods, plus a competitive retail mark-up.

Along with the simultaneous measures taken by the Finance Ministry to stabilise the exchange rates, largely built around the Ministry taking over many foreign currency functions from the Reserve Bank of Zimbabwe and so preventing even accidental creation of extra money supply of local currency, the opening of the import gates worked.

The local products suddenly reappeared and pricing started to make some sense. There was a bit of confusion in some quarters. As mealie meal, the product where all millers use grain from the Grain Marketing Board or contracts at GMB pricing, reappeared on the shelves in a range of brands, the most expensive brands seemed to be almost double the price of the cheapest.

That soon settled down and while price differences remained these were more modest and were those expected with producers with different levels of efficiency or leveraging on their brand loyalties and recognition to add a little premium.

The dozen products varied in local content. At one end was mealie meal, where all raw materials except the tiny amount of vitamin additives and the plastic for the bags was local. At the other end was rice, where the product was imported in bulk, and packed into consumer plastic bags. Again there are price differences, but this time based on efficiency, on the profit margins, and on what is now probably an overreliance on brand loyalty, although many consumers now have stronger loyalty to their wallets.

Even salt, which has a 100 percent imported raw material as Zimbabwe does not appear to have a fossilised inland sea, had some processing done locally: the blocks imported broken and ground down, the minute iodine content added, plus the slightly larger quantity, although still tiny, of the water absorbing additive, about 1 percent, so the product flowed easily and did not form lumps.

Most positively under this free trade environment, the local manufacturers undercut the price of the imported consumer-ready alternatives and took back their shelf space. This is important for the future, as the Africa Continental Free Trade Area comes into force. It shows that our local industry can, at least when it comes to essentials, compete effectively in a free market.

This is probably not surprising as these goods were the first goods to be milled and made and packed in Zimbabwe during early colonial times. It made economic sense to do so, rather than Government protection or other market distorting measures, and those essential products are the bedrock on which Zimbabwean industry was largely built.

So Prof Ncube’s plan worked, and worked better than the industrialists might have expected as they reformed. He kept his measure in force for some time, to make sure that everyone understood, and has only lifted it as the local supply chains have consistently proved they can manage, and manage at reasonable prices.

Of course it would only take a couple of minutes to dig out a copy of the old new section 91 and reimpose the duty free imports, so those trying to manipulate the Zimbabwean market need to be careful, in fact very careful. But with normal supply chains there was no reason for the Minister to forgo the revenue he can get from those consumers, with very high incomes, who are prepared to pay extra for luxury imported brands of the same cheaper products made locally.

He no longer needed to protect the ordinary person, and saw no reason to subsidise the whims of the rich.