eBusiness Weekly
Note from ZNCC
This is a continuation from last week.
The Zimbabwean economy is expected to grow by 5.5 percent in 2023 and 3,5 percent in 2024.
Growth is being weighed down by adverse climate conditions, power shortages, weak domestic demand and tighter global financial conditions. Geopolitical developments are also playing their part in dressing down economic activities due to interruptions in global supply chains.
Commodities’ Markets
The 2023/24 summer cropping season is expected to record normal-to-below-normal rains and this is expected to hurt yields, particularly on seasoned grains like maize. Farmers, without irrigable lands are encouraged to plant small grains and other drought-tolerant crops depending on the ecological region.
Although corn output is expected to decline in the 2023/24 season, the output is expected to be above the five-year average of 1,92 million tonnes.
According to the Grain Marketing Board (October 2023), maize output exceeded the target of 2,2 million tonnes a year in 2023. Maize price averaged US$315 per tonne between 06 September and November 1, 2023, while that for wheat and soyabean averaged US$410/t and US$525/t, respectively (Zimbabwe Mercantile Exchange, 2023).
On the international market, agricultural commodities (maize, cotton, tobacco, and wheat) prices have been on a slightly downward trajectory between May and October 2023 (Reuters, 2023). Maize prices declined by about 19 percent between January and October 2023 while wheat prices dropped by 3,3 percent between May and October 2023.
On the contrary, tobacco prices increased by about 23 percent between May and October 2023, from a price of US$3,01/kg on May 31, 2023 to US$3,70/kg on October 26, 2023. With an uncertain and highly volatile international market, agricultural commodities prices are expected to recover at the beginning of the year, 2024.
The decline in international commodities’ prices is expected to affect export earnings and ultimately, foreign currency receipts. Subsequently, pressure will mount on the local currency to depreciate as demand for the foreign currency remains heightened.
Suspension of liberalisation of the Importation of basic commodities
This is welcome from the Chamber’s perspective as removing import controls at a time when Zimbabwe is starting to internally generate most of its needed raw materials for value addition is, therefore, counterproductive and will reverse the gains hitherto accrued in agriculture.
Given how the playing field is still not even for value chains in Zimbabwe compared to value chains from countries where other finished products are sourced, a blanket removal of import controls is not the sustainable way to solve the market distortions.
Tourism sector
The 2024 National Budget proposes to renew the suspension of duty on new motor vehicles imported by Safari and Tour Operators, and this policy move is expected to be effective for the next two years.
However, there is a limit on the number of vehicles to be imported by each operator under this arrangement to five per annum.
International tourist arrivals are expected to increase following the relaxation of the travel restrictions in 2020 and 2021.
In the best-case scenario, international tourist arrivals are expected to increase to 2 million, 2,2 million, and 2,4 million in 2023, 2024, and 2025, respectively. The drop recorded in 2019, 2020, and 2021, is attributed to the advent of the global coronavirus pandemic.
The increase in international tourist arrivals is expected to boost the fortunes of the tourism sector going into 2024. Tourist arrivals in the first half of 2023 already surpassed the 2022 comparable period levels by 62 percent, according to the Ministry of Tourism and Hospitality Industry. The 2023 festive season will be hyped by tourism activities.
Suspension of duty on the importation of safari and tour vehicles
The proposed suspension of duty on the importation of Safari and Tour vehicles is indeed a welcome move and will provide relief to players in the tourism sector as this sector was one of the most hit by the Covid-19 restrictions.
The Chamber appreciates the Ministry of Finance, Economic Development, and Investment Promotion for taking this measure on board.
Energy Sector
Hwange Thermal Power Station is contributing about 60 percent to the national grid while Kariba Hydro, due to reduced production levels against the backdrop of an anticipated decline in water levels, is contributing about 38 percent with the remainder coming from the Independent Power Producers (IPPs).
Loadshedding, which was referred to as a thing of the past during the election campaign period has returned against the backdrop of maintenance works at Hwange Units 1 to 6 and Unit 7 going for operational tests for about 30 days starting October 25, 2023.
As approved in October 2019, electricity tariffs were averaging USc10.63 per kWh, and the Zimbabwe Energy Regulatory Authority (ZERA) put a new tariff adjustment of USc2/kWh on October 25, 2023.
The aim is to attain cost-reflective tariffs and encourage IPPs to feed additional energy into the national grid. However, electricity expense is one of the main cost drivers for producers, particularly in the agriculture, mining, and manufacturing sectors.
Diesel and petrol prices have surpassed the beginning of the year levels following the recent review by ZERA and the LP prices are still below the January 2023 levels although retreating since August 2023. Zimbabwe’s regulated fuel prices are comparatively higher than in Zambia.
Strategic reserve levy
Surprisingly, the Ministry of Finance, Economic Development, and Investment Promotion is proposing to review upwards, the Strategic Reserve Levy for both petrol and diesel by US$0,03 and US$0,05 respectively per litre, beginning January 2024. Transport costs are already high compared to regional neighbours like Zambia and Mozambique.
The increase in the Strategic Reserve levy coupled with the proposed 100 percent upward review in toll fees on other roads, not mentioning premium roads, will further strain the margins for businesses in almost every sector of the economy.
Also, given the erratic supply of grid energy, the current best alternative is diesel generators for businesses. A rise in fuel prices due to levies and excise duties (which were reduced not more than 3 years ago) rather than international oil price movements is an unsustainable position for a country that relies on road transport and in some instances, diesel generators.
We propose that the Ministry of Finance and Economic Development maintains the status quo for both Toll Fees and gas (fuel) pricing structure.
Informality
Zimbabwe’s informal sector is estimated to be contributing about 64 percent to GDP annually, on average. The informal sector is neither taxed nor under Government control. The punitive tax regime and overly regulated goods, financial, and capital markets have contributed to the deepening of the underground economy in Zimbabwe.
The International Monetary Fund (IMF) (2018) (though relatively old data) estimates that almost 5,2 million people trade in the informal economy in Zimbabwe, a sizeable of whom are women. This is also relatively similar to the findings reported in the FinScope Survey Report of 2022.
Some of the sector sub-sectors where informality is high include: (i) Retail; (ii) Distribution; (iii) Foreign currency informal/parallel/black market and (iv) Services- parallel structures running close to formal establishment. Additionally, the major causes of informality are reported to be rural-to-urban migration, high levels of formal unemployment, de-industrialisation, economic decline, and regulatory complexities and inefficiencies.
Taxation of micro-and-small enterprises
The 2024 National Budget does try to bring into the tax bracket, the informal sector by compelling wholesalers and manufacturers to sell only to licensed and tax-compliant operators.
Thus, only traders registered for VAT purposes and in possession of valid tax clearance certificates are eligible to procure goods from manufacturers. The VAT registration threshold is expected to be reduced from US$40 000 to US$25 000, or local currency equivalent.
Previous measures that were put in place to tax the informal sector such as the IMTT have been unsuccessful and ended up hurting the formal and compliant businesses the most.
The informal sector trades largely in cash and, therefore, any Government policy targeted at mobilising resources from this sector has to be close to perfect otherwise, the unintended consequences would be suffocating and disadvantaging the already compliant businesses.
The proposed measures imply that the administration burden of identifying registered or licensed traders rests on the manufacturer and wholesaler, thereby reducing efficiency and increasing the costs of doing business due to the need for extra manpower or additional mechanisms to identify the eligible traders.
Also, given that these SMEs trade in hard currency, they can easily import goods from neighbouring countries and utilise the remaining period of import liberalisation for basic commodities to cover a considerable period.
It’s the local producers that stand to suffer from this “noble” idea in that they are restricted in terms of fully exploiting the supply chain and limited in terms of the customer base.
The policy proposal, however, does answer the plea by local mega-retailers to restore sanity in the Wholesale and Retail sector.
However, our view is that the policy and regulatory environment requires serious reforms that are pro-business and largely encourage formalisation.
Streamlining business registration processes and procedures, reviewing the registration/license fees and levies, and reducing the period to register a company are of paramount importance as opposed to instituting ways to punish businesses.
The current efforts to integrate systems such as the Zimbabwe Revenue Authority, the Registrar of Companies, and the Zimbabwe Investment and Development Authority, should be harnessed in an endeavour to meet regional and international standards.
Concerning VAT, the Chamber had previously proposed a legislative amendment to allow VAT payments to be made on the actual cash received by the business and not on an invoice basis, especially when dealing with the Government where suppliers encounter delayed payments.
Also, the VAT burden should not be on businesses except to collect the VAT on behalf of the Government. Turnover tax is being used as an avenue in other countries and it can be used also as an option by ZIMRA.
Temporary closure of business
The Ministry of Finance, Economic Development, and Investment Promotion proposes that businesses owing ZIMRA may see their premises closed. The Chamber does not condone illegality and we religiously seek to promote good corporate citizenship in Zimbabwe, particularly among our members.
This policy measure was proposed in the 2022 Mid-Term Budget Statement and Fiscal Policy Review and it was rejected by all and sundry, but it has found its way into the 2024 National Budget Statement.
The closure of business owing to ZIMRA has adverse effects on various variables such as the employment rate and poverty levels, considering the trickle-down effect.
Since “Zimbabwe is Open for Business”, why would the Government of Zimbabwe continue to propose anti-business policies? ZIMRA and the tax-debt-ridden companies should rather agree on payment modalities say, for every US$1,000 credited into the company’s account, 10% should be remitted to the revenue authority for a specific period until the debt is cleared. This follows the assumption that only registered companies are under scrutiny in this case.
Seizure of goods
In addition to the proposed closure of the premises of companies with tax liability to ZIMRA, the proposal is to seize the goods of the SMEs who fail to remit taxes to ZIMRA. The SMEs will be compelled to register for VAT to regain control of the goods. The seizure of the goods will include storage devices.
It seems there is a bias towards the goods market, totally ignoring the services market which is big in terms of contribution to GDP.
The services sector contributes about 60% to GDP, on average, in Zimbabwe and other developing countries. In this regard, it suffices to say that the SME space is worsened in terms of operating environment and the majority will crumble at the bare minimum.
SMEs are the engine for growth and the sector contributes significantly to both GDP and employment for the marginalized groups such as women and youth. Friendly policies must be put in place to nurture and harness the SMEs and the start-up ecosystem.
The proposed closure of business premises and seizure of goods present administrative hurdles for ZIMRA and may deepen the animosity between the revenue authority and traders.
We reiterate that the reform of the tax system and procedural requirements for businesses to operate legally are fundamental to fostering a maximum compliance culture in the business world.
It does take time and financial resources to comply with all the requirements to run a viable and legal venture, and it is quite expensive in Zimbabwe for both mega-companies and SMEs. Because of the punitive operating environment, most businesses are choosing not to comply than to comply at all.
A raft of other punitive measures were proposed in the 2024 National Budget Statement including the proposition that taxpayers who fail to settle their dues within the prescribed timeframe shall be guilty of an offense and liable to a fine not exceeding level seven or imprisonment for a period not exceeding three months; failure to issue a fiscalised invoice or receipt and acquiring or using the electronic fiscal device will be deemed an offense liable to a fine of US$1,000 or equivalent in local currency.
Amidst the punitive nature of the proposed policy positions, businesses are urged to fully comply with the laws of the land even though it costs money.
Insurance sector
For the local insurance sector, vehicle insurance contributes about 40 percent of the premiums paid to insurance companies. The Zimbabwean insurance sector has exhibited a high level of resilience following episodes of hyperinflation that have eroded pension funds and insurance contributions. The full participation of the private sector in the insurance sector has resulted in more competitive and fair games within the insurance industry.
Third-party motor vehicle insurance scheme
The Government proposes to assume Third-Party Motor Vehicle Insurance for both private and public motor vehicles “as the case with other countries”. The scope of the Third-Party insurance cover will be broadened to include: medical benefits, rehabilitation, injury grants, and funeral grants and loss of income.
As per the National Development Strategy I (NDS1), the thrust is to foster a private-sector economic recovery and growth. In as much as the Government has a role to play in the economy, the Chamber is of the view that the primary role of the Government is to entrench the rule of law which includes fostering the enforceability of property rights, freedom of choice, and judiciary independence.
Also, the Government has to enhance social protection by taking care of the vulnerable groups of society as well as providing the most basic services for the day-to-day living of the general citizenry and efficient functioning of the economy such as healthcare, utilities, education, and national security.
It may be the case in other countries, but in the Zimbabwean context, the Government is generally inefficient and has performed dismally in providing basic care services to citizens, what more insurance services?
The Government should leave the whole of the insurance business to the private sector and ensure adequate capacity for the Insurance and Pensions Commission (IPEC) to foster a fair and competitive insurance market.
As for the public transport sector, this can be allowable but individuals’ choices for private motor vehicle insurance should be respected.
While the Government’s intention may be rooted in addressing certain issues, such a transition has significant unintended consequences for the private sector, particularly, insurance companies and the broader economy.
The private sector is set to be excluded from a significant segment of the market, leading to shrinking revenue streams and potential downsizing.
A Government takeover might lead to redundancies within private insurance companies as their role in underwriting third-party policies diminishes, affecting employment levels. In the current state, formal employment is quite low, and any further losses in formal employment will dampen economic prospects.
Finance and insurance activities contribute about 1.3 percent to total formal employment in Zimbabwe.
As already been alluded to, the participation of both the private sector and Government-owned entities in the insurance market is beneficial in enhancing efficiency, fairness, and competition.
The absence of private third-party insurance companies eliminates competition and builds a monopoly as the Government will be the sole provider. State-run enterprises have been lacking on innovation, efficiency (pricing, red tape, and service delivery), and responsiveness to market dynamics.
Also, underwriting third-party insurance involves substantial financial commitments and the Government may need to allocate significant resources to this cause. Accordingly, resources may be diverted from supporting other critical sectors such as infrastructure development and provision of basic services such as health and education.
While the Government’s intention to provide third-party motor insurance may stem from a desire to enhance public welfare, the potential disadvantages should be carefully considered. Striking a balance between public interest and a competitive insurance landscape is crucial for sustainability and viability.
This article was prepared by the Zimbabwe National Chamber of Commerce for Business Weekly
