There’s need to review tax regime

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Taurai Togarepi
The Zimbabwean economy has been going through deindustrialisation for almost two decades characterised by company closures, downsizing, a decline in employment in the manufacturing sector as share of total employment, and a precarious balance of trade.

To buttress this argument, as employment in the manufacturing sector declined, the contribution of manufacturing sector to Gross Domestic Product (GDP) also declined. The other symptom is the rise in the inequality of earnings over the years. Generally, the middle class disappeared in the local economy with only the low-paid and high-income remaining. Literature on this topic may suggest that deindustrialisation is part of economic development, especially in developed economies but for the Zimbabwean economy that conclusion may be misleading as the consequences are catastrophic. All sectors of the industrial economy experienced company closures and a decline in their share of employment to total employment.

What Causes Deindustrialisation

Following several years of hyperinflation, the capital base for most manufacturing companies was wiped out resulting in most manufacturing companies failing to replace ageing machinery. The result was a sharp increase in production costs and ultimately becoming uncompetitive on the international market. Locally produced goods became very expensive in both the local and the foreign markets, opening doors to competition from countries that enjoyed an absolute advantage for the same products.

In the past, the manufacturing sector used to get around 60 percent of its raw material requirements from the agricultural sector.

The poor performance of the commercial agricultural sector following the land reform resulted in the manufacturing sector resorting to importing many raw materials.

This move increased the cost of production owing to additional costs emanating from taxes that were being levied on most raw materials by that time.

The deterioration in the macroeconomic environment gave birth to a brain drain. This eroded the human capital base in the country exposing some companies to a skills gap.

Failure to maintain and upgrade infrastructure.

Zimbabwe used to have one of the best infrastructures in Southern Africa. Years of underinvestment and poor maintenance damaged this critical component for development.

The rail system, which is normally cheaper for transport of raw materials and goods, was almost closed down, forcing companies to use the most expensive alternative, which is the road system.

The policy framework in general was not conducive for investment as shown by sentiments made by most investors on issues surrounding property rights and the contentious indigenisation law. The low figures for both foreign and cash portfolio investment clearly show that the country’s investment policy framework was not as friendly as that in neighboring countries such as Mozambique, South Africa, and Namibia. They benefited from foreign direct investment when Zimbabwe could only manage figures of around $300 to $500 million a year.

High cost of funding.

Lending rates peaked at levels above 30 percent overburdening some companies, resulting in their failure to meet financial obligations and ultimately into their liquidation. Normally lending is based on the viability of the business and not security. However, in Zimbabwe, due to the high default risk, which saw non-performing loans peaking at 22 percent, banks insisted on security resulting in low access to funding as some companies, could not provide required security especially small to medium enterprises.

Industrialisation and Reindustrialisation

There is need for both industrialisation and reindustrialisation in the country if the economy is to achieve sustainable growth and improve the standard of living for its citizens. The challenges confronting industry calls for concerted efforts from all stakeholders. Some of the problems do not need money or machinery but just a change in the mindset of some business people, especially those that had abandoned the basic principles of running businesses.

The current administration has taken a positive stance to revive industry, as shown by calls by the President that his team will work tirelessly in order to create “jobs, jobs, jobs” in the economy. To support his calls, government proposed various policy frameworks to attract investment and create a conducive environment for business. Recently, the NRZ received new locomotives and wagons with more expected over the next few months. This is positive; however, government needs to do more in infrastructure development.

Government should consider embracing local economic development premised on integrated development planning and private-public participation. This will allow growth across most towns, cities and regions in the country. This will help regions to grow by benefitting from concentrating on areas they have comparative advantage.

Government should facilitate access to cheap funding at reasonable tenor. Many companies are highly geared and can barely afford to borrow at the current prevailing rates, which are steep compared to those prevailing in South Africa, which is the country’s biggest trading partner.

There is need to invest in irrigation which will help to improve yield in the agricultural sector which is critical in the revival of the manufacturing sector. Government needs to come up with legislation compelling beneficiaries of land reform to fully use their allocated land and be productive, as vast tracts of land are lying idle.

Lastly, there is need to review the tax regime in the country in line with regional and international standards. Zimbabwe has one of the highest tax regimes in the region and beyond. Reduction in taxes will free additional funds to companies, which can be reinvested in the business. There is also need to increase purchasing power to individuals by reviewing income and value added tax, which is critical to push real effective demand in the economy.

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