What the National Budget needs to do

Minister Chinamasa

Minister Chinamasa

Dr Gift Mugano Correspondent
The general macro-economic environment has been characterised by tight fiscal space, liquidity crunch, soaring trade deficit, low capacity utilisation and erosion of local competitiveness which has seen local players being relegated into mere spectators as foreign firms takes a more dominant role in the

economy. The summary of the problems affecting the economy today is uncompetitiveness.

Debates on how to improve competitiveness have centred on reducing the cost of doing business, addressing productivity issues and perceptions issues. My discussion this week is centred on how the National Budget can be a catalyst in addressing these three areas which are critical in addressing national competitiveness. It is also very important to bring this discussion now since we are moving into the mid-term fiscal review.

The starting point is to acknowledge we have a tight fiscal position with no room to manoeuvre.

In this situation we are not expecting miracles from the National Budget. My humble view is that the mid-term fiscal review and the forthcoming National Budget must focus on regulatory reforms which are aimed at creating an enabling environment for business to take place.

The policy measures which can be considered in our circumstances should among others include the local content requirement, tax reforms, clear pronouncement on indigenisation thresholds and deliberate efforts to commit limited resources one or two sectors of the economy as opposed to the blanket approach.

With respect to local content, the aim of local content requirements is to create rent-based investment and import substitution incentives.

Local content requirements are provisions (usually under a specific law or regulation) that commit foreign investors and companies to a minimum threshold of goods and services that must be purchased or procured locally.

From a trade perspective, local content requirements essentially act as import quotas on specific goods and services, where governments seek to create market demand via legislative action.

They ensure that within strategic sectors — particularly those such as minerals with large economic rents, or agriculture where the industry structure involves numerous suppliers — domestic goods and services are drawn into the industry, providing an opportunity for local content to substitute domestic value-addition for imported inputs.

Thus, in contrast to the traditional protected export platform proposed by many development advocates in the 1960s and 1970s — local content requirements seek to attract foreign direct investment (FDI) by firms.

Moreover, through local content requirements, Government can achieve these goals often without sharing in the risk of commercial undertakings.

Local content requirements are often paired with investment incentives, as part of a “carrot and stick” approach to attracting FDI. While the use of local content measures has attracted outsized attention inside and outside the WTO, governments (both developed and developing) employ a range of measure to attract investment, using a “carrot and stick” ap- proach.

On the “stick” side, governments use performance requirements, which can be generally understood (as defined by United Nations Conference on Trade and Development in 2003) as stipulations — whether related to local content, export performance, technology transfer, research and development (R&D), employment and domestic equity/ownership — imposed on investors, requiring them to meet certain specified goals with respect to their operations in the host country.

The specific policy goals — strengthening infant industries, increasing revenue, improving the balance of trade and lowering unemployment — are not always accounted for in the decisions of private economic agents. The use of some measures is restricted at various levels — the WTO Agreement on Trade-Related Investment Measures (TRIMs) prohibits the use of measures related to local content, trade balancing, export controls and certain foreign-exchange restrictions, and certain bilateral treaties limit the use of other performance requirements.

These measures, however, are nonetheless widely used by governments to align investment with industrial planning.

On the “carrot” side, governments use a range of investment incentives to offset costs incurred by firms that choose to establish in the host market.

These incentives range from direct transfers — e.g. grants (for R&D projects or new capital investment) and dedicated public-private investment funds — to indirect transfers, such as low- or no-cost Government services in marketing and distribution.

So, for Zimbabwe, local content is a panacea to economic woes: liquidity challenges, unemployment, balance of payment problems and export growth.

Our companies say with possible linkages with the agricultural sector must start now to source their inputs from local farmers say through contract farming.

This will obviously raise productivity of the sector through direct funding by cash rich companies as witnessed in the tobacco industry or farming schemes supported by Delta Beverages.

Rather than having these initiatives happening in an isolated manner, Government must have a deliberate local procurement policy aimed at making it a national requirement to support local trade.

Trade liberalisations without safety nets measures like local content requirement are suicidal. A number of countries as shown in this discussion embraced local content measure to safeguard their economies from the damaging effects of free trade.

South Africa, in 2012, promulgated the local content Act which requires of trade/procurement constituting 75 percent of total procurement to be done in South Africa.

We have watched mercilessly as a nation as countries stampede to fetch the United States dollar wreaking havoc in our economy. We have deliberately turned ourselves into a till machine for regional and global companies.

Yes, one may want to argue that no one want to buy local goods because they are not competitive.

One way to improve competitiveness is to raise productivity and this can only happen if we divert money which was supposed to be used by Pick n Pay to buy tomatoes and cabbages from Polokwane to a farmer in Mutoko! Procurement rules must be changed in line with the Government drive in empowerment.

Buy Zimbabwe is doing good job in advocating for local procurement but Government is taking time to take act. It is high time that the Ministry of Finance compels companies to buy locally by awarding tax incentives to participating companies and tax disincentives for non complying companies.

With respect to tax reforms, there is need to revisit various taxes levied by Government on business. It is believed that Zimbabwe is a high-taxed economy.

And, this, in itself creates perception problem especially in the mining sector and tourism sectors.

In the mining sector, there has been a longstanding issue of the multiplicity of taxes such as royalties, corporate tax, withholding tax, value added tax (VAT) and capital gain tax which when combined makes it very difficult for the mining industry to be viable especially in the face of depressed international prices.

In the tourism industry, the issue of VAT has become a thorny issue. Inasmuch as the Government has stayed put on this issue despite incessant request by the industry to scrap it, it is an open secret that tourist are now viewing the Victoria Falls from the Zambian side. Our hotels occupancy is very low while those on the Zambian side are filled to capacity while we generously donate the falls on a silver platter!

We have to be programmatic in our approach to issues which are being raised as ignoring it does not do any good by repel investors and tourist as in the case of the mining and tourism sectors.

It is a common problem for many developing countries that any effort aimed at scrapping a particular tax or lowering it is seen as a way of making the fiscal position more difficult.

The positive side of the possible benefits of the multiplier effect of that move are always ignored.

Our case compels us to revisit our taxes and reduce their multiplicity with a view of growing the economy and in the same vein broadening the tax base by taxing the informal sector (after organising it).

One of the roles of the fiscal policy is to set the tone for the economy which obviously should aim at building business confidence. In the last Budget Statement, the minister called for the indigenisation policy to be negotiated between line ministries in order to take into account specific interests of those sectors. This is a good move in the right directions.

However, we need to be more specific than that. The line ministries must come up with their sector recommendations which define the level of threshold which is expected from the foreign investor to give up for local participation. This must be reflected in the national indigenisation act and be made public. The current state is confusing investors as it leaves them in the dark when it comes to the application of the law.

There has been a lot of dodging on this issue and the more we dodge it the more are losing. We cannot have the comfort of putting lipstick on a frog to make it beautiful! Let us call a spade a spade.

Finally, over the years, we have tried to spread our limited resources over a number of competing needs but it has not worked!

It is common knowledge that even at a household level in the face of limited resources we just spend money on the basics, that is, mealie-meal, vegetables, rent and transport. Life goes on!

We need to borrow this household economics as a nation and put our limited resources to agricultural sector, civil servants’ salaries and other critical requirements which we can’t do without than to bother ourselves in spreading the thin resources across the normal budget lines.

For the last 15 years or so the Ministry of Finance has not fully supported the agricultural sector by availing adequate inputs on time!

However, we have witnessed food deficit over this period and we always timeously responded to it by availing resources for grain procurement from Malawi, Zambia and South Africa.

We have been supporting farmers in the countries at the expense of our own.

  • Dr Mugano is an author and an expert on trade and competitiveness. He is a Research Associate at Nelson Mandela Metropolitan University and Visiting Lecturer at Zimbabwe Ezekiel Guti University. Feedback: Email: [email protected] , cell: +263 772 541 209
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