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Taurai Changwa Business Forum
USUALLY Government policies directly impact on business sentiment. This is precisely the reason why any adjustment to taxes and duties can positively or negatively affect profit margins.
It can also influence investment decisions.
As cash is a coward, capital is likely to flee in markets where profit margins are affected. Conversely, tax and duty concessions to a particular sector can help to encourage both investments and optimism.
So the decisions Government make are likely to directly or indirectly grow or dim economic growth.
Politics also affects investment in the same way.
The ideological leanings of a government can either attract or discourage investment.
But, as always, there is a direct correlation between the political ideology held by a government and its policies.
However, the underlying factor that most often influences business is political stability.
Issues of whether a government is communist, socialist or capitalist are inconsequential.
Companies investing in a capitalist United States of America have an equal appetite to invest in communist China.
All that matters is whether the environment is conducive enough to generate a reasonable return.
A stable political system mostly likely makes for a business-friendly environment for investors.
Empirical evidence suggests that investors are likely to sit on the fence is jurisdictions where they are not guaranteed to make a sound return on their investments.
Such perceptions make up business sentiment.
A country’s tax policy is also very crucial to investors.
Governments usually depend on taxes for their lifeblood.
In an environment where revenue generating sources are limited, a government has no option but adjust taxes in order to augment revenues.
But companies always frown at such interventions.
So, to a large extent tax increases discourage investment, especially among fledgling entrepreneurs that are increasingly risk averse.
Upward tax adjustments are therefore computed as a cost to business.
Increased spending chews into savings and makes it difficult to allocate resources for private investment.
In turn, reduced investments affect the production of goods and services.
Statutory Instrument (SI) 64 of 2016 represents a tax instrument that is not targeted at local industries, but is meant to promote production through restricting the import of goods and services.
It, however, needs to be considered that the SI has both positive and negative consequences.
Promoting local production has a multiplier effect on the economy as it not only creates jobs, but creates taxable incomes that the Government can tap into.
The impact on the local manufacturing sector is therefore likely to be immense.
Perhaps the biggest impact that this will have on the local economy is to limit leakages.
When consumers buy local, money is trapped in the local system for a much longer period than when retailers and consumers rely on imports.
Small traders who rely on buying and reselling goods from foreign markets will definitely experience discomfort.
Long term gains have to be measured against short term comfort.
Unfortunately, through dollarisation, Government, through the Reserve Bank of Zimbabwe (RBZ), no longer has monetary policy instruments to influence the money market and the economy.
A rise in interest rates can limit borrowing and help cool the economy if need be.
It also softens consumer demand.
Low interest rates lower the cost of borrowing and make it easier for businesses to investment.
The ability to print more money can help in lowering interest rates and forcing banks to lend.
It has been used with considerable success in Japan, Britain and the United States of America.
All these options are not available to Government.
There are other factors that businesses take into account before they commit to investing, and these range from trade regulations, minimum wages, and the efficiency in processing permits and licences.
There are cases where businesses spend a lot of time and money to comply with regulations that ultimately prove to be ineffective and unnecessary.
Fair and effective regulations, however, promote business growth.
As argued earlier, policies can only be effective in a stable environment.
Although policies need to be changed time and again in order to adapt to changing circumstances, Government has to exercise caution in doing the same.
Constantly doing so affects business confidence from both foreign and local investors.
This is even more damaging for the banking sector.
Currently, confidence in the banking sector remains low.
Despite repeated assurances, many do not feel safe depositing their money in local banks.
The country needs to always plan ahead and assess risks before new policies are implemented.
Policies also need to be flexible and favourable to business.
Policies that are naturally burdensome lead to corruption and dishonesty.
- Taurai Changwa is an (AAZ) and has vast experience on tax, accounting, audit and corporate governance issues. He is the managing director of SAFIC Consultancy. He writes in his personal capacity and can be contacted at [email protected] or visit our facebook page SAFIC Consultancy or whatsapp on 0772374784.
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