9 November 2018

Zimbabwe: 2 Percent Tax Ill-Timed - Kanyekanye

interview

The Zimbabwe Independent projects editor Kuda Chideme (KC) caught up with Joseph Kanyekanye (JK), an industrialist and past president of the country's largest business member organisation, the Confederation of Zimbabwe Industries (CZI), to discuss the state of the economy, the need for reforms, including on currency issues and future prospects:

KC: The economy is in a mess. What needs to be done to turn things around?

JK: The irony of Zimbabwe in terms of numbers is that the numbers are showing that we are doing well: our exports have grown, we just had a record production for tobacco, but while all this has happened, government borrowing has increased, and we have developed an appetite to import -- which is unsustainable.

e are facing serious challenges which have manifest themselves in the chaos that we have witnessed in the last three months or so. There is a broad consensus that the twin evils of fiscal deficit and trade deficit need to be urgently addressed and, in dealing with that, you need to have some form of currency reform.

The method that government has been using to finance itself is not sustainable and clearly the economy needs to be rebalanced. I believe we should sort out agriculture as a matter of priority. If you look at something like soya beans, which we could be easily growing here, but is not happening and as a result we are now spending some US$300 million to import edible oils.

The majority of industry should access inputs from the farms, but that is not happening; ultimately that will feed into the base of the manufacturing companies because they then have to rely on imports for inputs. There are certain fundamentals that need to be addressed. We suffer from the lack economies of scale, we are not competitive and we should ensure that we have a currency.

KC: How should we be addressing the issue of currency reform?

JK: We have a situation where the authorities are saying that the RTGS balances and bond notes are at par with the United States dollar, but on the ground the market is saying something totally different. Why should the market believe that the $10 billion in RTGS and bond notes is backed up by real US dollars yet we are failing to settle about US$2 billion arrears to the World Bank and them? We should articulate quite frankly what the situation is.

The $10 billion (RTGS balances) should be allowed to float freely and, when that happens, you are likely to see the RTGS depleting because what is in demand is the US dollar. When it has depreciated, demonetise it and get rid of it from the system, then perhaps we can resort to a truly dollarised situation in a gradual manner. That way you deal with this issue of credibility. The market has already been psyched up, that it is the most likely outcome; this is the basis that most people are using to make decisions.

The debate then becomes about whether you adopt the rand or not because no country, including the US, has managed to be competitive using a strong US dollar even with the large economies of scale it enjoys. I am much more inclined to using the rand. It obviously has some connotations of losing monetary policy and the like, but let us admit it, we lost that already. I would rather have discipline and stability -- that is the cornerstone of investment. When you invest money, you need to be sure that your money is worth this much in the end.

KC: What should be done to make industry more competitive?

JK: Within the Southern African Development Community region we appear to be punching below our weight. Any industry that is producing for the Zimbabwean market cannot be competitive because of the size alone. We should strive to be part of the global and regional value chains and I am of the idea that using a soft currency like the rand would actually make us competitive. If you look at our numbers, you will notice that South Africa is one of the biggest trading partners.

Another area that would give quick returns would be the reform of state-owned parastatals, but we cannot seek to transform them while they are still under their parent ministries which oversaw their demise. I think that's naïve. They should be taken out of their line ministries and have the state enterprises reform unit housed under the Office of the President.

To signal change, there are certain things that need to be done that don't need time or a budget. While the current dispensation on policy appears to be in line, there is need to send the right signal so that you carry everyone with you. You do not need to wait for an audit; anyone that is of pensionable age should be retired, there is no need to hold workshops on that.

If you look at the private sector, there are a few companies that are actually still paying a travel-and-subsistence allowance because it is not sustainable, but you find government is still paying top allowances.

We must also pronounce that the land reform has ended and get on to making the land productive. There are several examples in the region where instruments have been designed to commercialise the land so as to make it productive.

KC: What is your position on the decision by Finance minister Mthuli Ncube to increase the tax on electronic transactions to 2% per transaction?

JK: In terms of the objective, which is rebalancing the economy, I will not argue with that direction. My view is that the sequencing and timing were wrong. While I understand the minister's thrust, which is to ensure that he collects tax from the informal sector, I still think that it was not well-thought out. There is empirical evidence which suggests that increasing taxation does not grow an economy. For a turn around you need incentives.

If it was meant to target, say, the costs associated with cutting the civil service, I would be agreeable to a scheme where the tax is for a limited period like we did with the Noczim debt, where it was levied on fuel. We cannot be increasing taxes without looking at our spending patterns.

I have reservations whether that will increase tax collection levels. Those at the lowest level in terms of income had taken in to electronic transactions, but when it becomes unbearable, the taxed will be innovative about the way they transact.

The timing was also another factor. People will ask that we have not seen any intentions by government to reform, but they are quick to tax and that will see unintended consequences.

KC: What do you make of the suspension of SI 122 by government?

JK: Some products were no longer available and it would be difficult to continue justifying the presence of that protection. My friends from industry will probably crucify me for this, but I am one of the few that do not believe in protectionism. Protection gives connotations of perpetual infancy, remember we are signatories to Gatt, Comesa, Sadc and all other groupings were protectionism is not permissible.

We need a strong economic base. We cannot be an economy that just relies on imports. It may have the impact of undoing the gains that have been gained in terms of capacity utilisation, but I do worry when goods such as mayonnaise and water are put on the open general import licence.

The SI 64 needed to have a qualifying criteria and sunset clause. It should have been done on a case by case basis. For instance, give support to the soya bean industry for a period of two to three years and allow them to capitalise and develop capacity, after which the market will be open and allow them to compete with product from the region.

KC: What are your expectations for the upcoming budget?

JK: There has to be serious consideration for fiscal consolidation. The ministers Transitional Stabilisation Program (TSP) was a good starting point so from the budget we would need to see some continuation and consistency.

The budget looks at 2019 numbers, but there will be no harm in the minister stating how the plan will be carried over the next three years. We need to signal changes, allow pensioners to go rest and deal with parastatals. I do not see the logic of having a permanent secretary and principal director. There is still also scope for merging some of the ministries. On the revenue side there should be a value proposition presumptive tax on kombis they are using the city infrastructure much more than anyone else.

The budget must have a stimulus which could be more of a monetary policy move.

I am of the view of that lets have a concessionary fund for tobacco and gold producers of some sort that leverages our RTGS balances to make sure we generate more foreign currency.

KC: What is your outlook in the short to medium term? Do you see things getting any better?

JK: For most businesses, 2018 is going to end as a bad year. All these price increases will manifest themselves in demands for salary and wage increments. I forecast inflation to go up to about 30%; it will however not reach hyperinflation levels but, short of a stimulus, we are going to have difficult times. Quite a number of businesses have scaled down operations while some have completely shut down but we remain optimistic. We hope as we go through this crisis government will engage industry I think lessons have been learnt on the 2% tax. It would not be as bad if there are fewer shocks for industry.

Having that as an ambition is a good thing. It can be done. It should be done if we can sustain double digit growth over a long period. It requires effort from all stakeholders -- government and private sector alike. We will need institutions that work and corruption will need to be next to nothing. That level of energy, discipline and teamwork does not require any distractions like we had in the past 20 years where focus was on the politics of succession. It is a lot of hard work.

Zimbabwe has gone through a difficult period and I think we owe it to future generations to ensure that we leave a legacy of prosperity.

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