Incentives for local producers will compliment Export Incentive Scheme

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Albert Norumedzo
The Zimbabwean economy is expected to grow by 3.7 percent. This trend is attributable to an agriculture sector that is expected to grow by 21.6 percent due to good rainfall and effective Presidential and Command Agriculture input programs.

The mining sector is also expected to rebound on the strength of recovering commodity prices. The tourism sector is likely to benefit from recent infrastructure development such as the Victoria Falls International Airport, as well as regionally competitive pricing.

Nonetheless, in efforts to promote exports that remedy the deteriorating trade balance position, the Reserve Bank of Zimbabwe also introduced the Export Incentive Scheme. This is meant to reward local exporters with a 5 percent commission for all export receipts.

Since the Scheme’s implementation in May 2016 up to June 2017,cumulative foreign currency inflows amounted to $4.9 billion. The mining sector contributed a total of $2.547 billion (69 percent),agriculture $1.156 billion (31 percent), and the manufacturing sector $246 million (5 percent).

The total incentive accumulated over this period is $187.8 million. The growth in exports over this period is a mildly impressive 4 percent, which is significant, given the macro-economic challenges confronting local industry. So to an extent, the Export Incentive Scheme backed by Bond notes has been successful as far as its purpose to incentivising exporters to produce and export more.

In a bid to promote and protect the local manufacturing sector, the Minister of Industry and Commerce Hon. Mike Bimha removed a number of goods produced locally from the open general import license. The effects of this are starting to be felt across the economic space. Some local producers have stepped up and invested in capacity to service the local market. Existent structural constraints which are yet to be addressed across the manufacturing sector have, however, limited the ability of the local industry to fully fill the void left by foreign producers.

Most companies in the manufacturing sector are burdened by antiquated equipment, erratic and expensive power supply, as well as a diminishing consumer base fueled by shrinking disposable incomes. This myriad of challenges still haunts the local manufacturing sector preventing the realization of desired growth and development. As the host of measures introduced by Minister Bimha have somewhat inspired evident recover in local production, the effects are yet to gain traction to the desired pace.

As the trade balance equation has two parts, exports and imports, the difference gives an either favourable or unfavourable balance. Tuhe Export Incentive Scheme is working to increase export capacity, reducing the unfavourable trade deficit. Local production capacity then becomes the key element. It is difficult to conceive a growth in exports without enhanced local production capacity.

Despite the existence of restrictive measures on imports, poor local production capacity will inevitably succumb to a black market of smuggled goods, countering the positive effects of the export incentive scheme. Thus, to sustain traction from the Export Incentive Scheme, local production must be vitalized.

The advent of the severe foreign currency shortage further elaborates a solid case for enhancing local production capacity. The need to develop home grown supply chains that are self-sustaining and keep money in circulation cannot be over emphasised.

If at all any economic emancipation from adverse global economic and political developments is to be realized, the country has to be able to meet most of its needs in a self-sufficient supply chain manner.

Numerous supply chains have decayed. A diverse representation of companies composes what has become a long list of entities ripe for revitalization. Asbestos mines such as Shabani and Mashava, pharmaceuticals such as CAPS, and food processors such as CSC all suggest local production capacity waiting revival. The demanded market is there. It is now a matter of capacitation. Authorities and industry captains should take decisive measures to incentivise local production capacity to satisfy local demand. This goes beyond the 5% Export Incentive Scheme into other fiscal incentives such as debt write-offs for those ailing companies riddled with massive statutory obligations like as ZIMRA and NSSA. This hopefully nurtures companies to take advantage of unfilled local demand.

Local production across key sectors like the agriculture sector which support a broad consumer base should also be incentivised. For example, if only tobacco farmers are incentivised, market fundamentals will see a gravitation of farmers into tobacco farming at the expense of maize farming and other non-incentivised locally consumed goods. The eventuality would be a need to import those disadvantaged crops to ensure food security.

The 5 percent incentive along with other definitive and effective incentives should not be exclusively set aside for export oriented production only, but should also be extended towards locally processed consumed goods to be able to enhance local production capacity and economic self-sustenance.

The consequence of prioritizing exporters at the neglect of local producers who serve the local market may have a cannibalizing effect which will has dire consequences that will ultimately offset the gains of the intended increased export capacity.

Albert Norumedzo is an Equity and Alternative Investment Analyst who writes in his own capacity.

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