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Eric Bloch Column

Economy riddled with anomalies

By Eric Bloch

THE Zimbabwean economy is so extensively regulated and political actions are so directed to address symptoms instead of causes, that policies aimed at addressing some economic or sociological objecti

ves often act in direct conflict with many others.

The pronounced reluctance to evaluate thoroughly the probable consequences of any policy or action results in immense prejudices to the very economy which it is desired to protect, stimulate and grow.

The examples are manifold to an extent that space constraints preclude all being cited. However, there are some, which are so incongruous and incomprehensible that they should be aired. Some of the foremost relate to government’s declared objectives of assuring the maximum of healthcare for all at the minimum of cost, but where the prevailing fiscal polices have a diametrically opposite effect.

In order to contain health costs, government very rightly does not impose any customs duties upon the importation of pharmaceuticals. However, if a Zimbabwean pharmaceutical manufacturer imports materials required as ingredients to produce pharmaceuticals, these materials attract duty. The effects are several.

Firstly, the imposition of the duty inevitably increases the cost of the pharmaceuticals payable by the consumer in outright conflict with government’s stated intent of containing health costs.
Secondly, the effect in many instances is to render the imported pharmaceuticals cheaper than those locally manufactured, resulting in greater than necessary outflows of foreign exchange — so critically required for other purposes and diminished viability for the local producers with consequential declining employment and downstream economic activity.

But the illogicality of policies in relation to health goes further. With absolute justification, government sought to ensure that the rendition of healthcare should not attract value added tax, in order that healthcare costs not be inflated. But in order to achieve this, government legislated VAT exempt status for healthcare instead of providing that such services would attract VAT at a zero rate. The first reaction must be that exempt and zero-rated statuses have the identical effect in that the patient does not pay VAT.

However, in practice that is not the case. Where a service provider is supplying VAT-exempt products or services, he cannot recover VAT charged to him by his suppliers by offsetting such VAT against charged VAT. If, however, his products and services are zero-rated, he can do so, and therefore receives a refund of the VAT borne by him. In the absence of such recovery, he necessarily builds the VAT paid by him into his charges, and therefore the patient pays more for the health services.

If government genuinely wishes to minimise healthcare cost of the populace, it will amend the legislation to provide that such costs are VAT zero-rated. The same situation applies to educational expenses. Government claims to strive to minimise the costs of education to such an extent that the Minister of Education, Sport and Culture has no qualms at destroying the viability of at least 46 private schools! But despite such claims, it exempts educational costs from VAT, instead of zero-rating them, thereby increasing the aggregate costs of the educationalists, and hence increasing the amounts, they must remove from those they educate.

Yet another marked example of anomaly within the customs duty and tariff regime is in respect of clothing and textiles. For many of such products, the rate of duty is a ludicrous $100 per kg (often less than $50 per T-shirt), but if a local manufacturer of clothing or textiles imports essential manufacturing imports, inclusive of certain yarns, dyestuffs, and machine spares, he is subjected to onerous import duties rendering his products uncompetitive in the domestic markets. This circumstance is presently particularly prevalent with Zimbabwe awash with Chinese textiles, clothing and footwear, imported at a fraction of local manufacturing costs.

Their lower cost is partially because in many instances the products are factory seconds and rejects, because of massive subsidies and incentives from the Chinese government, and because of the ridiculously low rates of duty applicable to such imports. Failure by government to address this anomaly must result in the failure of numerous factories, with resultant massive unemployment and many other negative economic effects.

Another anomaly of rapidly growing, very real and justified concern is that whilst Zimbabwe desperately wants to increase its foreign exchange generation through exports, it is fast destroying its exporters. It first did so by its heavy-handed approach to land reform, resulting in a near total collapse of agriculture to levels of less than 25% of those of only three years ago. Then it did likewise to the tourism industry by sullying Zimbabwe’s international image through its disregard for the fundamentals of human rights, to such an extent that tourism declined very considerably to levels of only 10% of those of a few years ago.

And now all other exporters are fast approaching the point of collapse. They are confronted with continuous and massively rising costs, including wage increments — often at least once a quarter — at levels significantly above the rate of inflation. The cost escalations are not confined to wages but include imports indirectly sourced through the parallel market, in the absence of alternative supplies, escalations in energy charges, fuel prices, and much else. But the exporters are not enabled to counter those rapidly increasing costs by being accorded currency exchange rate movements commensurate with the extent of cost increase.

Instead, the exchange rates are, through the “controlled” foreign currency auctions, virtually static.
In June and July, the compounded monthly inflation approximated 20%. In the same period, the exporter enjoyed an exchange rate increase of less than 5%, and therefore the export yield declined, in gross terms, by at least 15%. If that trend continues, almost all exporters will soon be out of business! If that occurs, Zimbabwe’s foreign exchange inflows will be minimal, and in such event the rise in inflation will be gargantuan as compared to that which would be triggered by an exchange movement at realistic levels.

One of the most evident anomalies that prevailed until last December was that parastatals had the tacit approval and acquiescence of government and the Reserve Bank to source foreign exchange in the parallel market.

However, since then, those in the private sector who did likewise in the belief that it was lawful, in view of the example set by the state, and in order to keep their businesses alive, have been vilified and subjected to prosecutions and punitive fines.

Since last December, the parastatals discontinued their patronage of the parallel market, but they could afford to do so as, pursuant to the monetary policies, they could source their foreign exchange requirements from the Reserve Bank at $824:US$1 (as compared to having previously paid up to $7 000:US$1 in the parallel market).

The parastatals were, and still are, being subsidised by those exporters who are being obligated to surrender portion of their export proceeds to the Reserve Bank at that spurious rate.

That subsidisation is enforced in complete disregard for the devastatory effects upon exporter viability, and like disregard for the discriminatory and unjust imposition upon exporters to sustain the operations of the parastatals.

Still another of the anomalies is that Zimbabwe has a Ministry of Anti-Corruption, but after it was brought into existence almost a year ago, only a negligible number of instances of prosecutions in the courts exist (exclusive of those relating to parallel market trading, initiated by the National Economic Conduct Inspectorate, which falls under the Ministry of Finance and Economic Development). When will Zimbabwe witness the prosecution of those identified years ago by the Chidyausiku Commission of Enquiry into abuse of the War victims Compensation Fund, or accused of corruption within Noczim and the Grain Marketing Board, amongst many others? Instead, corruption continues to be a catalyst of inflation.

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