SI 64 and the foreign currency shortages

One of the weaknesses of the current anti-corruption thrust is the failure to impound money, cars and properties that cannot be explained

One of the weaknesses of the current anti-corruption thrust is the failure to impound money, cars and properties that cannot be explained

When the Statutory Instrument 64 (SI64) was gazetted on June 17 2016, it was received with mixed feelings by various stakeholders. The policy removed 42 products from the Open General Import Licence. Manufacturers praised the policy as it protected them from the influx of cheap foreign competition.

Numbers for the year 2016 showed a much improved production level by manufacturers. According to the manufacturing survey done by the Confederation of Zimbabwe Industries (CZI) for the year 2016, the weighted capacity utilisation in 2016 was 47,4 percent, an increase from 34,3 percent in 2015.

One of the reasons cited for the improvement was the introduction of the SI64 which supported sub-sectors in the manufacturing industry such as foodstuffs, printing and packaging just to name a few.

These were quite pleasing results considering how the manufacturing sector had failed to grow its capacity utilisation since 2013.

While SI64 was introduced as a means of trying ramp up local production and thereby reducing imports, one would, in hindsight, criticise that the policy failed to look at the challenges facing manufacturers in a holistic manner.

The manufacturing sector relies on raw materials imports and, in an effort to resuscitate the sector, the policy either did not foresee foreign currency shortages or ignored them.

The 2016 manufacturing sector survey revealed that 68 percent of the raw materials are imported.

Hence, even with an import protection against selected finished goods, there is still pressure to pay for the required raw materials with foreign currency.

Consequently, the protectionism only works halfway as the supply side is stifled due to foreign currency constraints.

A capacity utilisation level of 47,4 percent means that more than half of the sector’s installed capacity is lying idle.

Without the adequate raw materials, it will be difficult to move capacity levels to significantly higher levels.

Nampak lamented on the predicament of foreign currency shortages at its recently held AGM.

The CEO highlighted that in the medium to long term, the company may face difficulty in procuring raw materials.

Ironically, Nampak is a beneficiary of the SI 64 after the paper, printing and labels industry were also included under protected industries.

Despite this dispensation, delays in procuring raw materials may result in the company failing to service the market smoothly.

Nampak is not in this predicament alone as many other manufacturers can attest that slow foreign payments have been stalling production processes.

Other than raw materials, items such as spares for machinery maintenance are of core importance but also unavailable locally. Factories therefore cannot run effectively without its periodical maintenance.

Current account figures for 2016, on face value, may imply that the SI 64 has been highly successful. Imports declined by 13 percent while exports went up by 5 percent, resulting in a 28 percent reduction in the trade deficit.

Dissecting the possible reasons behind the drop in imports (and hence trade deficit) may reveal that it is not necessarily an improvement in fundamentals, but possibly the reverse.

Under normal flow of foreign payments, it is a possibility that imports may have been higher as compared with 2015 thereby implying a widening rather than narrowing trade deficit.

Secondly, it can hardly be termed an improvement if imports of raw material or machinery spares are stalled due to lack of foreign currency.

Assuming no foreign payments constraints, one would expect an increase in the importation of raw materials as protected companies demand more to service the supposed increased market after protection.

Therefore it was not going to be unusual to see a widening trade deficit due to rise in imports in the early years of SI 64, which should, in later years, be offset by a rise in exports, holding other factors constant.

Will SI 64 therefore yield material progress under these foreign currency challenges? As long as Zimbabwe depends on imports for primary goods required for production, then foreign currency is availability is pivotal to the policy’s success.

Authorities have tried to resolve the foreign currency challenge through the introduction of export incentives. Exporters receive a 5 percent reward on the foreign currency they earn through exporting.

This is a means of incentivising exports and dissuading leakages.

The model implies that exports will increase thereby improving foreign currency flow into the country.

Loosely speaking, at the current level of export growth, it would take approximately 12 years for exports to adequately cover imports at current levels. To get a more effective result in good time, the full balance of payments should come into play.

The solution may lie in improving the capital account inflows which are investments into the country. Foreign currency reserves will improve as investments are made into various sectors of the economy such as agriculture and some shut down mining companies.

This may also work towards improving raw material availability locally and reducing pressure on the import bill. Companies are capacitated to push above their current capacity utilisation which will then become a more effective way of resuscitating exports. Subsequently, the trade deficit challenge is resolved.

Without the capital flows, any other schemes to improve foreign currency inflows are really just taking long shots.

Other than just protecting industries from foreign competition, efforts should extend towards looking at all the challenges industries are facing and assess whether protection alone is what is required.

Other constraints that the manufactures are facing as cited by the CZI Manufacturing Survey 2016 include capital constraints, antiquated machinery and shortages of raw materials.

Hence further to policing foreign competition, the country should open up avenues for investment. It is likely to be a more effective solution to the trade deficit as well the foreign currency reserve challenges.

 

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