New Govt must fast track economic reforms

Source: New Govt must fast track economic reforms | The Herald November 30, 2017

Dr Gift Mugano
President Mnangagwa’s inaugural speech brought smiles to all Zimbabweans and the international community in general. Quick takeaways from the speech are issues regarding dealing with corruption, creating an enabling environment for business, attracting foreign direct investments, addressing sticking issues on land reform and dealing with liquidity challenges.

The speech was a mouthful and this week’s instalment builds on this speech while expanding into a debate for the new Government to building an enabling environment for Zimbabwe. Key to this, is the need to fast track reforms in areas such as indigenisation and economic empowerment, investment climate reforms, market related policies, corruption and doing business reforms.

With respect to indigenisation, the current policy of awarding 51 percent shareholding to the locals and 49 percent to foreigners is not only draconian but also retrogressive. One can equate it to a man who is proposing marriage to a young lady and they become so abusive to their new bride in return. There is no sane woman who will agree to such a proposal.

This explains why Zimbabwe has failed to attract meaningful investments for the last decade. For the avoidance of doubt, we now have ten years since the Indigenisation Act was promulgated. We don’t need to take stock on whether or not the policy yielded meaningful results. The results speak for themselves.

Ironically, in April 2016 President Mugabe clarified the indigenisation law when the then Minister of Youth Development and Indigenisation Patrick Zhuwao threatened to close companies which failed to meet the 51 percent local threshold by April 1, 2016.

The clarification by the President was to me as good as shifting the policy from indigenisation to broad-based economic empowerment. So, within Government then, there was clarity on what the Government aspires to achieve on empowerment, but the desires failed short on the back of absence of legislative mechanism to enforce President Mugabe’s statement. Unfortunately, the President’s statement is not law.

There is therefore need to change the indigenisation law and even the name for that matter. There are more benefits which come with empowerment than owning a company. Zimbabweans are in dire need of jobs.

The new law on empowerment should focus on promotion of local procurement, value chain finance models, business linkages, local content regulations, value addition and beneficiation and capacitation of Small and Medium Enterprises (SMEs). In this new era we cant afford to carry over the indigenisation law!

Investment climate reforms, changing the indigenisation law to a broad-based empowerment policy is one huge step towards improving the investment climate. However, beyond changing the indigenisation law, there is need for the new Government to work on addressing the general impediments which are deterring domestic and foreign investors from investing in Zimbabwe. These include the following:

Addressing the tax regime, that is, reducing the multiplicity of taxes and collecting agents;

Combating corruption head on;

Provision of key enablers such as reliable electricity, water and sanitation, transport, energy and information communication technologies;

Adherence to property rights;

Streamlining of the doing business environment and procedures;

Establishment of investor complaints and settlement mechanism;

Instilling efficiency in both Government and state-owned enterprises including local authorities in their various aspects of service delivery just to list a few specific examples.

Market related policies, protectionism does not work. Market related policies have proven to be the best tool in addressing efficient utilisation of resources and fostering efficiency. To demonstrate this, I will use maize prices and soya bean.

Maize price floors are a serious challenge to the competitiveness of all players across the value chain. The Government of Zimbabwe has set the price of maize per tonne at $390. Regional prices are $150 and $137 per tonne in South Africa and Zambia, respectively. The landed price of maize in Zimbabwe is around $240 per tonne.

Currently, in order to encourage local millers to support command agriculture or contract farming, the GMB is selling maize to the millers at $240 per tonne. Ministry of Finance pays $150 as a subsidy. This scenario is problematic from four fronts.

First, it creates arbitrage opportunities where one will import maize from Zambia and sell it to the GMB and makes profit without doing anything. As a matter of fact, we have heard reports that Zimbabwe is importing maize from Zambia even though there are no import permits. Corruption is facilitating everything.

Second, the subsidy under the current fiscal constraints cannot be sustained. Going into the future, Government will not be able to continue to fund inefficiencies. If this happens, what happens to sustainability of the agricultural sector? This pricing regime is a threat to agricultural viability.

Third, let us assume that God once again smiles on us and give us good rains and we work as team Zimbabwe under command agriculture and through individual efforts and produce another bumper harvest, we will have to export maize. What will be our selling pricing to the region? Obviously, we cannot sell at $390. Is the Ministry of Finance going to subsidise the region? The answer is obviously no. What is means is that we will be stuck with our maize. If this situation happens, which is most likely, it will threaten agricultural viability and will take us from self-sufficiency to food insecurity.

Fourth, other players in the maize value chain (which are not millers) like Nestle are getting maize at $390. These companies are taking through put which is quite expensive and will have to compete with regional producers of say cornflakes both in the local and regional market. The current maize price is undermining local producers’ competitiveness.

On soya bean, Government is contemplating pegging soya bean at $700 per tonne while in the region is in the neighbourhood of $250 per tonne. For starters, there is no incentive for private companies to support contract farming on soya bean from a business case point of view. Remember the business of business is business.

This explains why we are producing around 21 000 tonnes of soya bean against national demand of 600 000 tonnes. As a result, we are spending around $250 million annually on imports of soya bean. The companies which are accessing local soya bean lost their regional competitiveness by 45 percent, that is, our cooking oil is 45 percent more expensive due to the high cost of soya bean.

This means we cannot export cooking oil. This was well before the three-tier pricing system. If one takes into account the impact of the three-tier pricing system, our cooking oil will be even much more expensive.

This case study (on maize and soya bean) demonstrate that controls or protectionism cannot work. A classic example of how market related policies are a panacea is the tobacco industry. We all know that the tobacco is sold in auction system. An auction is a market mechanism which is governed by the invisible hand of demand and supply.

As such, the prices are determined by market forces. Tobacco has been named the golden leaf which has seen increase in exports coming from it year in and year out as well as increase in the number of farmers and contractors participating on it because everyone is making money. President Mnangagwa in his inaugural speech promised a market based economy. I couldn’t agree anymore with him. This article is supporting The President’s observation and rally him all the way to Canaan as we build our great country.

Together we make Zimbabwe great.

• Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness Strategy. He is a Senior Lecturer at Zimbabwe Ezekiel Guti University and Research Associate of Nelson Mandela Metropolitan University. Feedback: +263 772 541 209 or gmugano@gmail.com