Export Incentives: Good Call On Managing The Trade Deficit
The Reserve Bank of Zimbabwe (RBZ) introduced the Export Incentive Policy in September 2016 at 5% of Gross Export Receipts in order to improve production of minerals and tobacco. The policy was widened to cover diaspora remittances, manufacturing sector and all other export sectors in the economy. Despite the unpopularity associated with the introduction of Bond Notes in November 2016, the export incentive scheme has demonstrated that supply side incentives are the best remedy to Zimbabwe’s perennial trade deficit and foreign currency woes.
It is worthy pointing out that the export incentive scheme had its negative implications especially increasing broad money supply, which fuels inflationary pressures in the economy but overall the scheme has many positives for key sectors in the economy such as Agriculture, Mining and Manufacturing.
After the introduction of the export incentive scheme in 2016, Gold deliveries to Fidelity Printers and Refiners increased by 16% to 24.8 tonnes in 2017 and notched an all-time high of 33.2 tonnes in 2018. In terms of export earnings, Gold is now the single largest contributor of foreign currency with export contributions in excess of $1.1 billion per annum. The same effect was also felt in Tobacco farming where farmers produced 189 million kgs of the golden leaf in 2017 and a record of 253 million kgs in 2018. It is worth noting that small scale producers now account for the bulk of gold and tobacco deliveries in Zimbabwe, showing the effect of the policy in channeling these commodities to the authorized buyers instead of the parallel market.
In the manufacturing sector, export incentives also managed to improve the Manufacturing Capacity Utilization (MCU) from 34% recorded in 2015 to an average of 45% from 2016-2018. It is not surprising that the MCU increased to 45% considering the fact that the manufacturing sector in Zimbabwe has direct linkages with Agriculture and Mining. Merchandise exports increased from $144.5 million in 2017 to $222.6 million in 2018.
Horticultural exports also recorded significant growth in 2018 after more than $112 million worth of produce was exported, up from $51 million exported in 2017. Zimbabwe earns more than 85% of its foreign currency through exports of gold, nickel, tobacco, chrome and Ferro-chrome, diamonds and platinum. In terms of imports; petroleum, electricity, grain, medicine, chemicals and motor vehicles account for over 50% of the country’s import bill.
Zimbabwe’s export list is mainly dominated by raw minerals and tobacco which fetch very low prices on the world market.
Implementation of policies to compel value addition locally will see a massive jump in export values and a significant improvement to the country’s balance of trade (BOT). Merchandise exports are hugely affected by the cost of doing business on the local market and acute shortages of foreign currency to import critical raw materials.
The high cost of doing business takes into account the cost of electricity, water and locally produced inputs which are largely indexed in US Dollar prices or pegged on black market rates. Other constraints to optimal production in manufacturing include lack of capital to retool, high costs of compliance and taxation, obsolete machinery and stiff competition from competitively priced merchandise imports from South Africa, China and Singapore.
The export incentive scheme had managed to improve the country’s balance of trade position in the last 3 years despite its negative impact on broad money supply. The growth of exports to $4.23 billion in 2018 demonstrates that Zimbabwe has got the capacity to produce for the local and export market if the policies are well aligned.
Some would argue that producers were starving the local market in search of foreign currency and export incentives, however that can only apply to merchandise exports which account for less than 5% of exports in 2018. Bulk of Zimbabwe’s exports are raw in nature hence they are largely produced for the export market. Export incentives had managed to bring life to the local economy while creating millions of jobs for small scale producers who ordinarily have less inclination towards supplying their produce to the formal market or authorized buyers.
Even though the export incentive scheme has been scrapped off, the government needs to draw from the lessons learnt from it. One major takeout is that producers at all levels can improve production and channel produce to the formal market provided there are economic incentives to do so. Lack of incentives provide fertile ground for the channeling of produce to the black market or smuggling of precious minerals out of the country.
It has been widely reported that gold deliveries to Fidelity Printers and Refiners fell sharply after the February 20 monitory policy announcement. Small scale miners have parallel market channels to sell their produce and evade taxes if the incentives do not match their economic expectations. It is therefore imperative to remodel the export incentive policy and target reducing the cost of production for same exporters.
Following the increase in fuel prices on the 12th of January 2019, the government introduced a fuel duty refund to key sectors such as agriculture, manufacturing, transport and mining. The impact of the policy is still to be felt on production, however the policy points to the direction the government should take to stimulate production in the economy.
One way of subsidizing key exporters in mining and agriculture is to rejig the local compliance and tax regime. Low hanging fruits can be downward reviews of license renewal fees, mining royalties, income tax and the Intermediated Money Transfer Tax (IMTT). The government recently suspended the 2% IMT Tax on tobacco purchases for local merchants as a way to reduce the costs involved in paying Tobacco farmers. Considering the value realized through exports of tobacco and minerals, producers are justified in their calls for tax breaks.
The export incentive scheme could have been scrapped by RBZ but its impact on the trade and export earnings was immense. The policy should be remodeled and be continued in a way that brings sustainability to government expenditure management and the country’s balance of trade position. Constant review of export incentives have become mandatory considering the rate of inflation, change in commodity prices on the world market and the need to fight smuggling of precious minerals out of the country. The central bank made a good call on production in the economy with introducing export incentives and the gains realized through the policy should be maintained so as to keep the country’s export receipts north of $4.23 billion in the mid-term while the government crafts a long term policy on import substitution.
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@example.com or alternatively follow him on Twitter @VictorBhoroma1.