Import Substitution: Best Remedy To High Import Bill
Zimbabwe imported goods worth $6.85 Billion in 2018, a 38% increase from 2017. That import figure can go up by 30% if smuggled merchandise and under-declared imports at the country’s border posts are factored in.
By Victor Bhoroma
The country’s trade deficit since 2010 averages $3.2 billion yearly and this worrying trend may continue if the government does not implement an import substitution policy.
Subsidizing the country’s imports does not only help the country save billions in foreign currency but it creates resilience in the economy through local employment creation, sustainable and increased tax revenues, promotes initiation and growth of local industries and reinvestment of profits in the local economy.
By importing virtually everything from South Africa, China, Singapore, India and Zambia, Zimbabwe is killing its home industries and exporting jobs to its import partners. The country now has a low industrial base where the government is heavily taxing a few compliant producers so as to meet its tax budgets.
From a continental perspective, 50% of Zimbabwe’s total imports by value in 2018 were purchased from fellow African countries which are South Africa, Zambia, Mozambique and Mauritius.
Asian trade partners supplied 38.7% of Zimbabwe’s total imports while 11.3% worth of goods originated from European nations, Australia, North and Latin America.
A closer look at the import bill shows that petroleum oils, machinery, electrical equipment, motor cars, vehicles and vehicle parts make up 55% of the import bill.
However, the real concern is on billions spent on goods that are (or can be) produced locally and products that used to be produced in Zimbabwe.
Zimbabwe imports Agricultural products (Maize, Wheat, Soya and Soya bean oil, processed cereal, tea and Potatoes) worth $350 million; Fertilizers and Agriculture Chemicals worth $295 million; Plastics and Plastic related products worth $263 million; Pharmaceuticals worth $250 million; Industrial and Home chemicals worth $200 million; Iron and steel products worth more than $160 million; Animal, Vegetable Fats, Oils, Waxes worth $150 million; Tissue Paper, Facial Paper, Newsprint and paper products worth $100 million; Skin Care, fake hair and beauty products worth $40 million; Flavored water worth $25 million and Buses worth $20 million.
The list goes on to include refrigerators, margarine, glass bottles, sugar, animal food, fruit juice, liquid pumps, batteries, alcoholic and non-alcoholic beverages, fish, eggs, beef, milk, bricks, granite tops, cement, asphalt mixtures, seeds, toothpicks, vegetables and fruits.
The import bill for the above goods is valued at more than $2 billion and includes entirely everything used for household and industrial consumption leaving the local industry in a very precarious state.
Zimbabwe is over-reliant on South Africa, China and Singapore with 80% of the country’s consumables originating from those 3 trade partners.
This means that bulk of the products sold in the local market have a small component of imported inflation, which makes it difficult for the government to control the retail price of most goods in the local market.
The situation has been made worse by the tumbling exchange rate between the local RTGS currency and the US Dollar which is the currency of choice for most imports.
Without a strong industrial base that can meet domestic demand and export surplus output, the Zimbabwean economy is very vulnerable to global shocks caused by fluctuations in commodity prices.
This undesirable situation calls for a long term vision from the government on industrial growth instead of a narrow and short term pursuit of high revenues that emanate from growth in excise duty.
More than 40% of the country’s imports can be produced in the local market provided the import substitution policy pursued by government favours initiation and growth of local industries.
Import substitution refers to government strategies that emphasize the replacement of agricultural and industrial imports to encourage local production for local consumption.
The major constraints to optimal production in the local industry include shortages of foreign currency, lack of capital to import new machinery and technology to replace obsolete equipment, high taxation levels, stiff competition from cheap imports and the high cost of production in the market which is compounded by hyperinflation.
The cost of doing business takes into account the cost of labour, fuel, license/permit renewals and utilities such as electricity, water and internet connection.
The cost of production in Zimbabwe is one of the worst in the SADC region, as a result, the import can be landed in Zimbabwe at cheaper prices than most locally produced goods.
This explains why flavoured water, tissue paper, beverages, fruits, milk and other fast-moving consumer goods from South Africa can be sold at competitive prices on the local market despite the transport component importers pay.
After realizing the negative impact of importing locally available products, Zimbabwe passed Statutory Instrument 64 of 2016.
The policy was a silver bullet for the local industry as capacity utilization rose by more than 13% within 6 months from July to December 2016.
Capacity utilization in the industry has been falling of late due to foreign currency shortages and renewed growth in merchandise imports into the country. SI 64 was later revoked by the passing of Statutory Instrument 122 in 2017 and lifting of import restrictions in October 2018.
The latest government actions were mainly driven by pressure from South Africa to lift import restrictions for their merchandise exports and by the need to ease pressure on foreign currency demand on the Reserve Bank of Zimbabwe (RBZ).
It has become imperative for the country to implement import substitution strategies that identify producers of all imported goods that make up billions in imports every year.
The policies should also look at resuscitating closed industries that mainly produced iron and steel products, chemicals and industrial raw materials.
Production incentives which are not monitory subsidies should be given to local producers depending on production capacity and employment levels.
Tax breaks on raw material customs duty and excise duties on fuel can have a positive impact on the cost of production locally. This will simply offset the country’s import bill on locally available products thereby helping manage the widening trade deficit in a sustainable manner.
This can only make sense if the government understands that short term growth in excise duty revenues comes at a cost to the local producers and local employment.
Victor Bhoroma is business and economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on [email protected] or alternatively follow him on Twitter @VictorBhoroma1.