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Policy implementation key in reindustrializing economy

05 Sep 2020 at 15:15hrs | Views
The re-industrialization of the economy is a vital piece in the achievement of Zimbabwe's sustainable economic development goals and effective participation in the Africa Continental Free Trade Area (AfCFTA). The local industry has been operating below par for the past 2 decades due to a number of challenges that include low agricultural production, high cost of doing business in the market, shortage of foreign currency to import essential raw materials, obsolete machinery and lack of cheap capital to retool, stiff competition from cheap imports and depressed domestic demand. The World Bank pointed that Zimbabwe's GDP declined from US$24.31 billion achieved in 2018 to US$21.44 billion realized in 2019, with the manufacturing sector contributing 12% of the total figure. At its peak in 1998, the manufacturing sector used to contribute 42% to the country's export earnings. In 2019, the manufacturing sector contribution had plummeted to about 4% of the total export earnings of US$4.2 billion.

Deindustrialization in Zimbabwe started around 1995 but at a gradual pace, then picked up in 1997 and 1998 after unbudgeted government expenditures led to increase in inflation and loss of value for the Zimbabwean Dollar. The fast-track Land Reform Program of the year 2000 put the final nail on the coffin as supply disruptions strained agro based processors. From the year 2000 to 2008, the sector witnessed rapid decline in productivity with investors divesting from Zimbabwe, and suppliers from South Africa and Asian countries gradually filling the void left by industries which were closing shop.

The 2009 to 2013 period saw a spectacular resurgence in capacity utilization to an average of 45% as the multi-currency regime stabilized inflation and restored incomes which were critical in domestic consumption. However, underlying structural problems cost the industry as consumption for imported commodities also spiked under the stronger US Dollar. Agriculture subsidies and import restrictions for selected merchandise in 2017 and 2018 brought a renewed sense of hope. However, the minor recoveries made in the last 10 years could not be sustained and remained temporary as policy inconsistency added weight to structural challenges. Currently the industry capacity utilization hovers around 30%.

Zimbabwe's manufacturing industry has strong backward and forward linkages with agriculture, thus growth in agriculture productivity directly leads to improved capacity utilization in manufacturing. However the sector has its own pertinent challenges which need to be addressed if the country is to entertain any hopes of re-industrialization. Policy implementation directed at addressing key pain points below needs to be pursued.            

Managing high cost of production

The high cost of producing locally is one of the primary reasons why Zimbabwean products struggle to break into the export market. The high cost of doing business takes into account the cost of capital (Bank loans), transport, electricity, water, labour, fuel and rentals. To move cargo in Zimbabwe, it costs US$0.12 per tonne/kilometer using road and US$0.06 per tonne/kilometer using rail. The SADC average is US$0.07 by road and US$0.03 by rail. Similarly diesel currently retails at US$1.09/Litre in Zimbabwe as compared to a regional average of US$0.97/Litre. The same comparisons can be done on water, electricity, rentals and interest on loans. The high cost of production makes Zimbabwean products uncompetitive in the local market where foreign products compete for the Dollar.

Consequently, the same products cannot compete on the export market. Currently a number of large scale manufacturers outsource all their production from South Africa and simply do break of bulk and packaging locally. To address this structural constraint, the government needs to urgently reform its tax regime especially on import and export fees, streamline permits paid to government agencies, reduce excise duty on fuel and import duties on raw materials. To address labour cost, the Labour Act needs to be amended so as to give flexibility to employers to hire contract workers easily and to terminate contracts on short notice without the burden of blanket fixed minimum retrenchment packages. The flexibility removes hesitation from various producers to hire contract workers as and when need arises, which in effect benefits both the employee and the employer.

Import Substitution incentives
Half of the country's import bill of US$4.6 billion in 2019 is composed of products that used to be manufactured in Zimbabwe but are now being imported from South Africa, Zambia, Malawi, China and Singapore. The government should provide incentives to struggling local suppliers of major imported products so as to reduce the high import bill (save foreign currency), create value chain jobs and reindustrialize the economy. These incentives have to be non-monetary and can range from tax holidays on attaining specific production targets, preferential import tariffs and excise duty on raw materials, subsidized electricity for selected heavy industrial consumers (For example struggling fertilizer and industrial chemicals producers) and guarantees on cheap loans for retooling. The government needs to incentivize import substitution for products that can be manufactured locally such as Fertilizers and Agro Chemicals, Industrial Chemicals, Newsprint, Paper and Packaging materials, Pharmaceuticals, Iron and steel products, Furniture, Plastics, Skin Care and Beauty products. Policy documents with no incentives will not help to restore the glory days to yester year industries.

Protectionism policies
The surge in manufacturing sector capacity utilization experienced in 2016 and 2017 after the passing of import restrictions (Statutory Instrument 64 of 2016) provides evidence to the importance of protectionist policies. Protectionism is a key policy in every country in the world from Australia to United States and from Europe to South Africa. Zimbabwean manufacturers cannot compete with counterfeit and cheap products (product dumping) from other countries given the high cost of producing locally. Local consumers have a choice to purchase cheaper and quality products from outside, however that choice leads to the demise of the local industry and it has to be addressed through policies that give local producers competitive advantage over imported products. Customs duty for finished goods (say Refrigerators) cannot be the same as customs duty for importing components used in manufacturing refrigerators locally. Finished products should not be imported duty free (unless under national emergency) and have to pay more in terms of Value Added Tax (VAT), Customs and Excise duty than raw materials of the same products.

Protectionism policies should encourage industries to produce locally than import finished goods and should be taxing to those that import finished goods so they look for local alternatives. The government would be understandably justified in fixing prices for all products that benefit from protectionism policies so as to protect consumers and curb profiteering.

Export led growth
The value of manufactured exports in 2019 was about US$140 million (less than 4% of the total export earnings). Zimbabwe exports raw minerals such as Diamonds, Gold, Nickel, Lithium and Iron which are then imported as finished products. In agriculture, the country exports raw and semi processed tobacco, cotton, tea, sugar and other horticulture crops. An export led growth strategy should start with reduction of export fees on value added commodities (based on percentage of value addition), transparent approval of export permits, export financing via commercial banks and tax incentives to exporters of manufactured products. Raw commodities (say raw Tobacco) should not have the same export fees or licenses with exports of finished products (Cigarettes) or processed tobacco. The government needs to identify exporters of finished goods and facilitate production growth by any means possible. Manufacturers who invest their capital in retooling for export purposes must not struggle to get approval for national project status.

The positive effects of industry led supply side interventions to reindustrialization cannot be overemphasized. Strategic policies to reindustrialize the economy represent a sustainable formula to curtailing the recurring trade deficits and stabilize the foreign exchange market. The gains realized in subsidizing agriculture and ramping up mining production can only make economic sense if commodities from those two key sectors are processed by the local industry than be exported in raw form, then ultimately be imported as finished products by consumers. Reindustrialization calls for an active participation by government and moving away from mere policy rhetoric to actual implementation of the policies with clear milestones in the short, medium to long term.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email or Twitter @VictorBhoroma1.

Source - Victor Bhoroma
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