Urgent case for import-substitution

BY PAISON TAZVIVINGA/VUSA NCUBE

Tuesday (April 27, 2021) marked the 43rd Reserve Bank of Zimbabwe (RBZ) foreign exchange auction. The auction has certainly outlived the pessimistic prognosis of some, or most, contingent upon one’s social circle. Dare we say, kudos thus far to the fiscal authorities!

An investigation into the reliability and effectiveness of the forex auction system thus far, and strategies to optimise the same (if need be) would make for an interesting research piece. Apologies for digressing.

A review of progressive forex allocations paints an incisive image of import expenditure. While activity at the auction does not represent the totality of import expenditure, it does represent a reasonable proxy.

Since inception in June 2020, US$1,2 billion has been allocated through the auction. The graph indicates the dollar value allocation to the various requirements of the economy, as requested through the auction.

The generally upheld economic principle of the significant few and the trivial many is apparent in the distribution of forex at the auction. About 84,56% of forex allotted is attributable to only five out of the 14 classifications.

These are raw materials (42,14%), machinery and equipment (17,29%), consumables including spares, tyres and packaging (9,28%), services including loans, education, dividends and portfolio investments (7,92%) and retail and distribution, including food and beverages (7,94%).

Subject to commercial viability, there is a strong investment case for a meticulous due diligence exercise on our imports, and this can then be the basis of identifying prospects for local production to meet local demand.

Furthermore, regional markets may be exploited in light of the African Continental Free Trade Area (AfCFTA) if the local environment is cost friendly, production is efficient, quality is sterling and sufficient scale is attained to optimise cost per unit to inspire competitive pricing. This would reduce the import bill, improve the complexion of the current account and increase aggregate demand through employment creation.

Over the period, US$69 million (5,84% of total) has been allocated to medicals, pharmaceuticals and chemicals. Coincidentally, the government has just approved a five-year strategy to capacitate the pharmaceutical industry.

Market share of local pharmaceutical products is at 12% and the thrust is to increase this to 35% by 2025. Limited research and innovation in the pharmaceutical space has caused most pharmacists to initially retail medicines and ultimately establish an enterprise, hence the proliferation of pharmacies.

The brand loyalty enjoyed by local brands such as mazoe and cerevita has been enduring. These are unfortunately lone stars in the competitive premier league of regional and international brands. They are thus burdened, overly so, with the mandate of both retaining local demand (disincentivising imports) and inspiring foreign consumption (exports). To sustainably substitute imports, we need more mazoes and cerevitas in more domains than the food industry.

Marketers therefore have a critical role to play in guiding the product development process by ascertaining established consumer preferences while also incorporating emerging and imagining future consumer requirements.

The role of the diaspora in alerting foreigners to local products is also much more significant than imagined and exploited.

Lessons from India

India implemented an inward-looking trade policy which transformed its industrial sector in the early 1990s from a reliance on jute and cotton textile to become one of the most diversified industries in the world.

The diversification was driven by a concerted promotion of small-scale industries. Financial support, among other government intervention strategies, was extended to small-scale businesses and that allowed even those without sufficient capital to venture into business. As a consequence, there was a massive development of industries in the electronics and automobile sector.

There was also noticeable growth in the public sector, notably in railway, telecommunications and air travel.  Although some argued that the public sector growth was fuelled by monopolisation of public entities, such as telecommunications, where the state-owned entity enjoyed monopoly for a long period, the sector’s contribution to India’s economic growth cannot be overlooked. These state-owned enterprises thrived, as they provided much needed support services to the emerging entrepreneurs.

While economics of protectionism has become somewhat antiquated, and poses significant geopolitical risks, due to a perception of hostility, the curious case of India tells a tale of the benefits of domestic production for both local and offshore demand.

Import-substitution timing

According to the Confederation of Zimbabwe Industries, industrial capacity utilisation in Zimbabwe was at an undesirable 36,4% in 2019. This was, inter alia, a result of forex inadequacies, price uncompetitiveness vis-à-vis cheap imports and energy challenges due to erratic electricity supply.

As imports gained market share and the economic environment became business unfriendly, industries were choked and only a few were left operational at very low capacity.

However, when Covid-19 pandemic forced the closure of borders, thereby disrupting business supply chains, countries were left without any option than to be inward looking for solutions. This saw the return of locally manufactured goods on retail shelves, as industry capacity utilisation increased to above 60%.

The spike in local production was also enhanced by pro-business interventions such as the foreign currency auction system, which contributed to stabilisation of the forex rate and a targeted money supply, which kept the inflation rate in check. If this momentum continues then we are likely to see a sustained surge in local industry capacity.

The operationalisation of the AfCFTA implies imminent unrestrained movement of goods and services across borders in Africa on an unprecedented scale. This brings along uninhibited competition in the local market, while also presenting an increased potential market in foreign lands. It is from this perspective that we must emphasise on the urgent case to revive local industries, so that when AfCFTA becomes fully active, local industries will be on a better footing to compete with other regional firms. Without sufficient scale and production efficiency, it is impossible to be price competitive.

Another point which makes import substitution a good business case is the compromise of rules and standards evident in some products. The global market is now awash with poor quality goods some of which do not meet safety standards, hence the harm posed to consumers.

Faced with such a situation, it becomes paramount to substitute those goods with home grown solutions whose standards are guaranteed. This can be a point of competitive advantage that can be explored to win market share in the global market.

In addition, the world is witnessing a shift from the dominance of multinational institutions to the one where smaller, specialised and flexible firms are gaining momentum.

Small firms which are closer to consumers and can quickly do market research to understand consumer preferences and incorporate those in their products and services are likely to win in the volatile global market. Current market dynamics call for swiftness in addressing consumer wants, something which may be difficult in traditional multinational entities due to their hierarchical structures.

The case for import-substitution is thus an urgent one, and we trust that policymakers are hard at work considering such and other pressing issues.

Ncube is a financial analyst and a keen student of the world. He may be reached on vusavellah@gmail.com. Tazvivinga is a development economist. He may be reached on ptazvy@gmail.com. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, immediate past president of ZES. — kadenge.zes@gmail.com or mobile +263 772 382 852