Abbie WestfallNote from the ZNCC
Preamble
The Mid-Term Economic Review comes at a time when the economy is witnessing stability in both the prices of goods and services and the exchange rate.
However, it remains to be seen if the prevailing stable macroeconomic environment is durable. The global pervasive risks include climate change, artificial intelligence (AI), geopolitics and health hazards. Zimbabwe, as a commodity-dependent country, movements in international commodities’ prices also present a risk.
In our submissions to the Parliamentary Portfolio Committee on Budget, Finance, and Investment Promotion in May 2024, the thrust was mainly focused on legislative amendments following the abandonment of the Zimbabwean dollar and the subsequent introduction of the structured currency, the Zimbabwe Gold (ZiG).
With the 2024 National Budget remaining unchanged, concern is raised regarding the ability of the Government to finance ongoing programmes.
The chamber appreciates the opportunity to engage with the Ministry of Finance, Economic Development and Investment Promotion. This is testimony to the warm relationship that exists between the Government of Zimbabwe and the private sector.
Mid-term fiscal policy measures — our reaction and suggestions:
Reduction in presumptive tax
The reduction in presumptive taxes is a positive move that will lessen the drift into further informality in a bid to evade the tax. Lower taxes are likely to enhance compliance. During the period between January and June 2024, total tax revenue amounted to ZiG33.9 billion, constituting about 92.9 percent of total revenue.
The main contributors to revenue were Value Added Tax (25.3 percent), Personal Income Tax (20.7 percent), Excise Duty (12.3 percent), and Corporate Tax (9.7 percent). Corporate Income Tax contributed about 20 percent in the first half of 2021. When individuals and households contribute to tax revenue more than corporates, this depicts an economy that is deeply rooted in the underground economy.
Reviewing the tax system to encourage formalisation and tax compliance is a matter of urgency. However, the Treasury is increasing taxes in each budgetary period to milk as much as the Government can on the already shrinking tax base. The proposal to review the presumptive tax structure downwards aims to provide relief and enhance tax compliance among small businesses. This is a welcome move, as it will reduce the tax burden on MSMEs and encourage them to formalise their operations.
VAT exemption of meat
Positive move for the livestock value chain which is likely to boost demand for livestock products. A win for both producers and consumers.
This exemption will likely reduce the cost of production for livestock farmers and could lower the retail prices of meat products, benefiting consumers and potentially increasing demand. The intended purpose of encouraging formalisation may not be realised in the short-to-medium term. The lack of adequate impact assessment before imposing policies, coupled with policy inconsistencies, has resulted in an unintended consequence of pushing players into the informal sector.
Special surtax on
beverages sugar content
The proposal to waive the special surtax on beverages sugar content for the period 1 January 2024 to 8 February 2024 is a relief for businesses in the beverage sector. This measure acknowledges the tax burden on businesses and provides an option for those who have already paid to credit their future tax obligations, which is a fair approach.
Payment of taxes and
user fees in local currency
The flexibility of settling corporate tax in line with the proportion in which income is earned is welcome. Given the scarcity of the ZWG on the market, it is highly unlikely that many corporates can manage the 50:50 threshold. Our call is for the Reserve Bank of Zimbabwe to ensure adequate liquidity in line with the demand and supply of the ZiG at any given time.
Enhancing tax compliance for MSMEs (use of POS machines)
While the move is commendable, it is the cost of compliance (in terms of bank charges and the IMTT) that is of major concern for most MSMEs. Furthermore, the extent to which most MSMEs will meet the requirements of banking institutions to acquire point-of-sale machines might need to be considered.
Excise duty on electronic cigarettes
The question is whether much thought has been given on the extent to which this tax can retard growth in this nascent industry. There already are enough threats to the local tobacco industry from international lobbyists.
Introducing Excise Duty at the rate of US$0.5 per ml of electronic cigarette content from 01 August 2024 is a measure to regulate the emerging market of electronic cigarettes. Effectively, the excise duty raises the price per unit of each cigar sold.
A standard vape has, on average, a tank capacity of between 0.5 millilitres and 4 millilitres. Thus, the price increases will range between US$0.25 and US$2, depending on the contents in millilitres. The price increase has a knock-on effect on demand as it raises the average cost of production and ultimately, the final price.
The introduction of excise duty on electronic cigarettes represents an excise shock that would drive more players into informal trading of these cigarettes, subjecting formal players to unfair competition notwithstanding the quantum of the tax. The excise, valued at US$0.5 per ml, is one of the highest in the world.
Comparatively, Zimbabwe’s excise duty on e-cigarettes is almost three times that of the Republic of South Africa. The imposition of such a tax discourages the shift of consumers’ preferences from traditional cigarettes to more cleaner and friendly cigarettes. The question is whether much thought has been given to the extent to which this excise duty can retard growth in this nascent industry. There are already enough threats to the local tobacco industry from international lobbyists.
Our request is to withhold imposing the excise duty on cigarettes and get rid of the SI 139 of 2024 until proper research and consultation with key stakeholders are done on e-cigarettes.
As a representative of the private sector across all sectors, we continue to call for predictable and sustainable fiscal policies which provide revenue benefits to the Government and the sustainability and profitability of the industry.
While the Government has maintained the current excise duty of a mixed regime despite adding an excise on e-cigarettes, we are requesting that for the 2025 fiscal year, the Government adopt a specific duty rate of US$7.50 per 1,000 cigarettes. We believe that a specific excise duty regime is the best option for the industry in the short-to-long-term as it ensures predictability and addresses some of the challenges relating to the manipulation of the ad valorem component as well as the subsequent creation of illicit trade posed by the current regime.
The ad valorem is complex to administer as it requires price monitoring by ZIMRA. Ideally, under an ad valorem excise duty system, brands of the same category should have almost similar or similar ex-factory prices.
To prevent misdeclaration in an ad valorem regime, ZIMRA would need to constantly monitor the recommended retail prices of each brand comparing this against the declared ex-factory price to calculate the ad valorem excise duty component.
We recognise that modelling a new US dollar-specific excise duty rate is complex given the dynamic nature of the economy. The introduction of the ZiG in April 2024 has made us re-evaluate our rate proposals made in prior submissions to the Ministry of Finance, Economic Development and Investment Promotion.
Accordingly, a rate of US$7.5 per 1,000 cigarettes will ensure tax neutrality and not cause an excise shock, enabling a win-win situation between industry players and the Government.
Following the recent introduction of excise duty on electronic cigarettes, we reiterate that the Government should engage in robust discussions with players in the tobacco industry before any change in the cigarette excise regime.
Transit fraud
As the chamber, we are aware that transit fraud continues to cause havoc in the market. We continue to advocate for professionalism and integrity in the sector and we are in full support of the Government’s initiatives to eradicate transit fraud.
We believe that transit fraud has a potential to disrupt the steady growth ushered in by the Second Republic.
Products smuggled through transit fraud will unfairly compete with legitimately imported and locally manufactured goods and also prejudice the State of the much-needed revenue. Transit fraud makes the playing field uneven and drives out local manufacturers and legitimate players in the industry to the ground.
However, we have reservations regarding the proposal to subject transit fuel to payment of duty and levies at the port of entry due to unintended consequences.
Our reservations are guided by the following reasons:
1. Lack of clarity on who will pay for the customs duty for the fuel, between the importer, the exporter, the transporter, and/the agents;
2. The additional cost of doing business due to bank charges/transaction fees incurred during the duty payment and refund process;
3. The efficiency of the refund process given the administrative bottlenecks ZIMRA encounters daily.
On average, between 200 –400 tankers pass the Zimbabwe’s border posts per day and a tanker pays, on average, customs duties and levies of around US$23,000.
Accordingly, if the transit scheme is implemented, there will be staggering amounts of customs duty to be paid and repaid, which may be beyond the capacity of the players in the supply chain and the customs authorities. Efficient management of the duty refund process by ZIMRA is crucial to ensure compliance and avoid unnecessary delays for businesses;
4. The lack of presence of some financial institutions at the border posts to ensure a seamless refund process;
5. Financial constraints of fuel suppliers due to the customs duty requirements;
6. Consideration for alternative financial arrangements for securing duty payments;
7. Traffic diversion to alternative corridors such as Kazakateza, Kasumbulesa, and Kazungula. Besides, affected parties in the region may also lobby for the same in a retaliatory way by imposing similar measures to Zimbabwean bound goods thereby hampering the smooth movement of goods;
8.The possible adverse effect on Zimbabwe transport, logistics, clearing and freight and forwarding sectors;
9. The effects of the proposal on Zimbabwe status as a regional transport hub. Zimbabwe is an important transit route for goods to Zambia and DRC, from South Africa and Mozambique. The imposition of duty, regardless of it being refunded, has a negative consequence on the movement of truckers along these routes.
10. The imposition of duty on transit fuel (though being refunded) goes against regional and international agreements that Zimbabwe is signatory to:
a. Zimbabwe acceded to the WTO Trade Facilitation Agreement in 2018 and one of the requirements as spelt out in Article 11 is Freedom of Transit. Article 11 stresses that traffic in transit shall not be conditioned upon collection of any fees or charges imposed in respect of transit, except the charges for transportation or those commensurate with administrative expenses entailed by transit or with the cost of services rendered.
b. Noting also the SADC Protocol on Trade, particularly Article 2, which states that; The Member States undertake to grant all transit traffic freedom to traverse their respective territories by any means of transport and that member states undertake not to levy administrative or service charges.
c. The COMESA Protocol on Transit Trade and Transit Facilities (Annex 1) also states that The Member States undertake to grant all transit traffic freedom to traverse their respective territories by any means of transport and that Member States undertake to not levy any import or export duties on transit traffic save for administrative or service charges.
d. Annexes to the Agreement establishing the African Continental Free Trade Area (AfCFTA) indicates that Member States undertake to grant all transit traffic freedom to traverse their respective territories by any means of transport and that Member Sates undertake not to levy any import or export duties on transit traffic save for administrative levies or service charges.
11.It is crucial to note that imposing duties and levies on the fines may not stem Transit Fraud since abusers of the current transit regime will simply adjust to the new modus operandi and continue to defraud the fiscal authorities through the consumption of uncustomed fuel. Thus, smuggling may increase given the corruption at our ports of entry. Given this background, we propose the following measures:
Regularisation of clearing agents association;
Capacitation of ZIMRA to purchase more electronic seals;
A round table to gather feedback, suggestions and potential solutions from all stakeholders;
Strengthening of risk management techniques and blacklisting of perpetrators;
Report undischarged transit operations daily and recover the duty and taxes due without delay. Legislation should be effected to this stance;
Implement fuel marking programmes;
Strengthening of the transit fuel supply chain in Zimbabwe; and
Automation of the transit fuel acquittal system to reduce collusion
Intermediated money
transfer tax
The goals of the financial inclusion initiatives will not be reached with the IMTT in force. The IMTT was reported to have contributed about 3.4 percent to total revenue in the first half of the year.
Comparatively, IMTT contributed about 8 percent to total revenue during the same period in 2022 and about 6.7 percent between January and June 2023. The IMTT coupled with other taxes charged on bank transactions such as withdrawal levies force people to transact in hard cash thereby, reducing the amount of tax collected via such means.
The IMTT has an incremental effect on the cost build-up of players in the supply ZNCC submission to the Ministry of Finance, Economic Development and Investment Promotion chain, from the producer to the wholesaler, to the retailer, and to the final consumer. Adding VAT, the tax collected per transaction will be about 17 percent. The double-taxation effect the 2 percent tax has by imposing a tax on tax. When an entity acquires goods that are subject to Value Added Tax (VAT), the 2 percent tax is calculated on the amount inclusive of the VAT amount. T
he 2 percent tax does not take into consideration the rules of double taxation but taxes the players in the supply chain on amounts including VAT. Every registered taxpayer is an agent of ZIMRA who charges and collects VAT on behalf of the government. As such, taxpayers are being taxed on the payment of taxes through agencies.
This further increases the cost of production. This cost is then pushed onto the final consumer who takes the burden of the VAT amount. Our position is that the IMTT is destructive as it is working against the government’s thrust to promote the use of electronic means of payments and the financial inclusion drive. Therefore, it should be removed entirely,
taking into consideration its dwindling contribution to Government revenue.
Reserved Sectors
While the move is beneficial for locals, water-tight enforcement mechanisms are required to plug all loopholes. Otherwise, foreigners will always find a way to penetrate the sectors working in cahoots with the same locals whom the government is trying to empower. The capacity of locals to fully participate in these sectors needs to be interrogated, otherwise the model might have to be modified.
Access to Finance
As reported by Afreximbank, about US$400 million is being availed to Zimbabwean – based panAfrican firms seeking to undertake investments across the continent, a development expected to give further impetus to the region’s integrated industrialisation agenda. We request that the Government provide a guarantee on loans being channelled to the private sector to accelerate the industrial transformation agenda.
Public Debt
In US$ terms, total debt stock stood at US$21 billion as at the end of June 2024. External debt stock was recorded at US$12.3 billion. As the debt crisis looms, servicing that debt will absorb a significant portion (at least 40 percent) of total government revenue in the second half of 2024. Since that is unaffordable, the Government will have to choose between still greater arrears accumulation and a debt-restructuring agreement with creditors. This is a problem that will become increasingly urgent. The African Development Bank regarded Zimbabwe as the highestprice economy in Africa – with a massive debt overhang, facing severe fiscal pressures as it copes with the El Nino drought and years of falling real living standards and inadequate public investment. Without successful re-engagement and a resolution of the debt overhang, the currency problem will continue. Transparency in the debt resolution and reporting systems is vital and of interest to the private sector given the sovereign and country risk associated with unsustainable debt levels.
Funding Government Programmes
Learning from recent experiences, paying contractors for mega projects in local currency has been a destabiliser to the exchange rate. The recent blacklisting of 51 service providers by the Government is a testimony that this behaviour carried over into the ZiG era. For stability to be durable, it is critical to ensure that local currency payments to service providers should be wellplanned (budgeted for) and targeted.
Border Management
Zimbabwe’s border management is currently facing significant challenges, including border porosity, which has led to the proliferation of illegal and informal trade. The consequences of these challenges are severe, including substantial financial leakages and job losses in the local industry due to competition from cheap and undeclared imports. Key Issues include:
1. Border Porosity and Illegality/Informality: The porous nature of Zimbabwe’s borders facilitates the smuggling of goods, which undermines the formal economy and leads to widespread illegality and informality. This issue not only deprives the Government of revenue but also fuels the growth of an underground economy that is difficult to regulate.
2. Financial Leakages: It is estimated that financial leakages at Zimbabwe’s ports of entry amount to between US$1.8 billion and US$2.2 billion annually. These leakages represent lost revenue that could have been utilised for critical national development projects, including infrastructure, healthcare and education.
3. Impact on Local Industry and Employment: The influx of cheap and undeclared imports, facilitated by inadequate border management, has led to intense competition for local manufacturers. This competition has resulted in the downsising of local industries and the loss of between 18,000 and 20,000 jobs. The erosion of the industrial base weakens Zimbabwe’s economic resilience and threatens the livelihoods of thousands of citizens.
Our recommendation is to enhance border security and surveillance through the deployment of advanced technology such as drones, surveillance cameras and biometric systems to monitor and secure border points more effectively. We urge ZIMRA to move with speed in the ongoing digitisation of the border clearance and surveillance systems. We also urge the authorities to launch public awareness campaigns to educate citizens on the negative impacts of smuggling and informal trade on the economy, emphasising the importance of supporting local industry.
Value Addition and Industry Value Chain Support
Zimbabwe’s role as the host of the 2024 SADC Industrialisation Week offered a unique opportunity to catalyse the country’s industrialisation agenda through deliberate support to the manufacturing sector. The ultimate goal was (is) to drive sustainable economic growth, boost industrial capacity, and solidify Zimbabwe’s integration into regional and global markets. Cognisant of the limited fiscal space, we urge the Government of Zimbabwe to consider or elevate:
• Offering tax rebates and other fiscal incentives to companies investing in critical manufacturing sectors. Priority should be given to those industries that add significant value to local raw materials, such as cotton processing, agro-processing and pharmaceutical manufacturing.
• Accelerating the development of industrial parks and special economic zones (SEZs) focused on value addition through public-private partnerships (PPPs). A key project is the ZimbabweZambia Agro-Industrial Park, which should be fast-tracked with the unlocking of necessary financial resources.
• Encouraging PPPs to invest in infrastructure that supports the entire value chain, including logistics, storage and processing facilities, particularly in underdeveloped regions with high potential for industrial growth. The thrust towards rural industrialisation requires enabling infrastructure including communication, energy, transport and other supportive services.
From the findings of the 2023 ZNCC Annual State of Industry and Commerce Survey, the main challenges being faced by the manufacturing sector include, inter alia: lack of cheap but patient capital, power outages, costly ease of doing business, corruption, lack of adequate skills and trade facilitation challenges such delays at the ports of entry.
CONCLUSION
Indeed, the Mid-Term Economic Review highlights significant developments in Zimbabwe’s economic landscape, reflecting both progress and challenges. While the stability in prices and exchange rates is encouraging, the durability of this macroeconomic environment remains uncertain, especially amidst global risks like climate change, AI and geopolitical tensions. The chamber’s engagement with the government, particularly in areas such as tax reforms, fiscal measures, and industrialisation, underscores the importance of a collaborative approach. Moving forward, fiscal policies must remain predictable, supportive of industry growth and aligned with broader economic goals. The chamber remains committed to advocating for sustainable policies that promote both government revenue generation and the profitability of the private sector, ensuring that Zimbabwe’s path to industrialization is both resilient and inclusive.
Bongani Ndlovu