Eric Bloch Column

Minister should return to real world

By Eric Bloch


ON Wednesday last week, whilst visiting the Zimbabwe International Trade Fair, the Minister of Industry and International Trade, Samuel Mumbengegwi, met w

ith a large cross-section of Bulawayo’s industrialists. The meeting was convened under the aegis of the Matabeleland Chamber of Industries and was intended to be a dialogue between the minister and those in the front-line of Zimbabwe’s manufacturing sector.


The industrialists very much welcomed the minister’s willingness to meet with them, for with very rare exception manufacturing enterprises are struggling to survive. They are confronted with more afflictions than the famed 10 plagues that smote Egypt in biblical times. The ills that have progressively weakened industry include a gross inadequacy of foreign exchange required to fund imports of raw materials and spares, to meet export marketing expenditures, pay for technology transfer and service debt, and the like. Even for those industrialists engaged in exports, the foreign exchange resource is insufficient for essential needs.


After mandatorily surrendering50% of export earnings to the Re-serve Bank, the exporter is supposedly entitled to use the remaining 50% for own purposes, subject to conformity with a Priorities’ Schedule prescribed by the Reserve Bank. In practice, more often than not the applications to the exchange control authorities to use the exporter’s own foreign exchange is declined despite compliance with the prescribed priorities or, in contradiction to an alleged processing of applications within 24 hours, is approved belatedly and after great prejudice to the applicant.


Other operational hurdles rising ever higher include frequent discontinuance of electricity supplies as the Zimbabwe Electricity Supply Authority (Zesa) resorts to repeated load-shedding, very often at times markedly at variance with Zesa’s issued load-shedding programmes. Yet further hindrances to operational viability are soaring production costs as a direct consequence of the hyperinflationary environment, massive and frequent tariff increases by Zesa, Tel*One, Zimpost and other parastatals, and inevitably necessary increases in salaries and wages. Many industrialists are hampered in achieving consistent production by a lack of coal for boilers and furnaces, with Zimbabwe’s only coal producer reportedly able to produce approximately 15% of national requirements only.


Industrialists who attended the meeting state that the minister said that there was no risk of Zimbabwe’s external energy suppliers (Mozambique, South Africa and the Democratic Republic of the Congo) cutting off supplies because government had raised all the foreign exchange required by Zesa and therefore the electricity supply authority was up-to-date in payments for imported supplies, was not in payment default and had no arrears. Not only did this answer fail to address why Zesa is resorting to massive load-shedding, with many industrialists losing at least two days’ production in each week, but it also conflicts with a report published only two days later in the state-controlled press that: “Negotiations between Eskom of South Africa and Zesa to find a sustainable way of settling a US$16 million debt the latter owes Eskom for electricity imports” are in progress.


The same article stated that: “The power utility is failing to raise the required foreign currency to pay debts to regional power utilities”, and gave an estimate that “the utility’s debt is more than US$143 million”. Moreover, Zesa’s management services officer Daniel Maviva is quoted as saying that there are no cuts in power supplies by the foreign suppliers “as yet”, which clearly implies the possibility of such cuts in the future. The minister’s response also conflicts with the fact that Zesa has been in very extensive dialogue with industry and mining in an endeavour to motivate payment for supplies to them in foreign currency and, in such dialogue has given comprehensive details of the magnitude of Zesa’s foreign debt.


However, the minister berated industrialists as being the cause of their own problems, and of the problems of Zimbabwe, alleging that the only reason for Zimbabwe not having sufficient foreign exchange for its needs is the unpatriotic and unlawful accumulation by industrialists of foreign exchange outside of Zimbabwe, and their externalisation of their Zimbabwean assets. This attribution of blame, and this spurious contention, is with minimal foundation.


Admittedly there are some in Zimbabwe who resort to “transfer pricing”, whereby they under-invoice exports or arrange for over-pricing of imports, obtaining the amounts under-invoiced externally of Zimbabwe, as they do refunds of amounts excessively charged on imports. And, of course, there are Zimbabweans (from all sectors of society and of all races, and undoubtedly including many in authority) who seek to externalise some of their assets. Although unlawful and beyond condonation, this is a norm for any country with an economy of extended distress and with onerous exchange controls. But to suggest that this is done by almost all industrialists is ludicrous in the extreme.


The majority of industrial exporters necessarily must repatriate every cent of their foreign exchange earnings, for their profit margins are usually very low in order to be competitive in export markets notwithstanding high costs of production. They also need that foreign exchange to fund raw material imports for production for local market sales, for repair and maintenance of plant and machinery, for the servicing of foreign debt and licence, franchise or technology transfer fees. Thus, even if they were disposed to flout the exchange control laws and regulations, they cannot afford to do so and therefore it is very few who resort to transfer pricing. This is even more so in respect of imports, for any price inflation in order to externalise funds, results in higher import duties, thus increasing costs and pricing products out of the range of market competitiveness.


Insofar as Zimbabweans using other methods of externalising assets is concerned, there is little doubt that most do so by an exchange (at an inordinately high cost) of Zimbabwean funds for foreign funds. The main sources of such foreign funds are reputed to be dealers who purchase foreign currencies from Zimbabweans working abroad, mak-ing payment to Zimbabwean resident relatives, and then selling the acquired foreign exchange to Zimbabweans. Based upon an estimated three million Zimbabweans working abroad, and assuming an average sale of US$500 per month, that represents US$1,5 billion per month.
 
But if they did not sell their foreign exchange, few of the Zimbabweans who are employed outside of Zimbabwe would send their foreign exchange to Zimbabwe, and they are not required in law to do so. Would the law so require, that law would be incapable of enforcement. Thus, although asset externalisation in breach of exchange controls cannot be condoned, in practice it has a minimal impact upon Zimbabwe’s foreign exchange resources.


The realities are that Zimbabwe has a disastrous scarcity of foreign exchange because, first and foremost, it has alienated the international community, and has defaulted on its debt servicing obligations. As a result, it does not receive balance of payments support from the International Monetary Fund, project finance from the World Bank, has an insignificant amount of foreign direct investment, and a diminishing inflow from donor states.


Secondly, Zimbabwe has sustained a monumental decrease in export earnings from the agricultural sector, wherein production levels are a fraction of those previously achieved, the reduced production being almost totally due to an ill-conceived, grossly mismanaged, and greatly abused land reform programme, instead of pursuit of a positive and constructive programme of agricultural indigenisation in harmony and collaboration with commercial farmers.


Tourism earnings shrunk catastrophically as tourist arrivals diminished in reaction to Zimbabwe’s political instability, lack of law and order, and distressed economy. Manufacturing sector exports also declined in the absence of devaluation, and the benefits of the February, 2003 exchange rate adjustments have fast been eroded by inflation and by higher unit costs as production levels fell in reaction to power cuts and forex shortages. In contrast to the minister’s advice to industry, the realities are almost wholly government’s mismanagement of the economy. If the minister wishes to have credibility, and if he wishes to address industry’s problems meaningfully, he should emigrate from the land of make believe and return to the real world.