Prices of locally produced goods are seen rising as manufacturers pass the cost for excise duty on fuel to consumers, analysts have warned.
“Our view is that the revenue measures, from Treasury, paint a murky picture of Zimbabwe in the short to medium term. The increase in excise duty on fuel will likely increase the cost burden for most companies. Companies, under normal circumstances, will have to pass that cost to consumers in a bid to maintain profitable margins. In Zimbabwe, however, consumers are already reeling under falling disposable incomes, hence presenting challenges for companies to increase their selling prices,” MMC Capital says in its weekly market report.
“In an environment where companies are already reducing prices to encourage sales, the rise in fuel cost will result in a further squeeze in margins.”
Finance minister Patrick Chinamasa presented his mid-term fiscal policy statement last week and hiked excise duty on fuel, drawing criticism form economists.
Analysts say that a more sustainable model would be for the government to intensify its efforts in implementing investment friendly policies.
“These measures will be key in opening up the economy to capital and trade flows. As a potential source of funds, foreign investment can break the vicious cycle of low income, low domestic savings, and low investments. Foreign investment can occur in two ways,” the report says.
Foreign companies can invest directly in a domestic economy via foreign direct investments by building or buying property, plant and equipment or indirectly through domestic economy by purchasing securities such as equity and fixed income issued by domestic companies.
These forms of foreign investment will potentially increase Zimbabwe’s capital stock, leading to higher productivity, employment and wages, and even increased domestic savings.
The recent deals with China and Russia are good starting points and a lot still needs to be done to ensure they actually take off.
An analyst with a local bank said the excise duty hike would squeeze consumers and corporates alike, warning government revenues would plunge.
“In addition, some of the measures, such as the excise duty hike on fuel, may only squeeze the consumer and corporates leading to an overall reduction in revenue. Consumption by households and investments by corporates are critical pieces in growing national output,” the analyst said. “Yet the increase in excise duty on fuel may adversely fuel cost-push inflation in an environment characterised by company closures, an increase in unemployment and static and/or declining disposable incomes.”
He said cost-push inflation would result in higher prices to consumers, reducing consumption.
“This has for the past months seen most consumers now preferring basics ahead of luxuries. For businesses this increases their cost of production and may lead to consumers resorting even more to imported goods. Hence further reduction in demand and profitability. There is thus a need for policymakers to find sustainable ways of reviving demand which will ultimately lead to an increase in job creation, increased investment and profits ultimately increasing money in government coffers,” he said.