Mercantilism: A necessary evil

Biti is on record saying that his mid-term fiscal policy review is not going to make any proposals, since the new government will take over. In that regard, there are certain issues that the new finance minister should urgently address.

What we need is an expansive and mercantilist fiscal policy that can vigorously checkmate the current economic problems. We have already seen that exports are staggering behind surging imports, and the trade deficit for January to April alone stood at $1.9 billion. Estimates are actually saying that trade deficit will close the year at more than $3 billion.

Company closures and downsizings have become the order of the day. Of late we have read about Reckit Benckiser shutting down the its Harare plant, CAPS pharmaceuticals going under the hammer, Dairibord venturing into toll manufacturing, with Steelnet, Muga Foods and Cairns going under judicial management.

Retrenchment rise

These are just few examples. Latest figures from the Retrenchment Board are saying that there has been a 15 percent rise in retrenchments, between January and April, compared to the same period last year. Based on reported cases, at least 863 workers were retrenched between January and April, compared to 746 for the same period last year.

A budget deficit is also looming, as the country is going to need $132 million, that was not budgeted for, to conduct elections. Whether the solution is cutting expenditure in the 2013 budget or raising supplementary resources, which should be quickly addressed in August. What the government has done to raise the election money is to freeze itself, by not paying ministries and service providers – and gathering that money in the election basket.

Defaulting payments to service providers, however, comes at a cost; as interest charges will accumulate. So, the government will have to pay more than $132 million in the end, and there is nothing concessionary about that.

More funds needed

Supplementary funds are going to be needed to import maize and wheat.

Zimbabwe experienced a lower maize yield this year and there are indications of a food deficit situation. Zimbabwe will therefore need to import maize to mitigate food shortages. Wheat production for the current winter season will be also very low, as only 3,000 hectares has been planted, against the targeted 60,000 hectares. The planted wheat will give us about 12,000 tonnes, meaning that we will have to import the additional requirement of 400,000 tonnes. That means we are going to need additional $134 million to import wheat and that is money that was not in the budget.

Shrinking sector

To show that the manufacturing sector has been shrinking, its contribution to exports has fallen to 11 percent between January and April. In 2011, manufacturing contributed 26 percent to total exports. That can only point to the fact that companies are closing down and jobs are being lost; this implies that the government will have to pay more in social services.

Against the above background, the next finance minister is faced with the mammoth task of addressing these challenges in his fiscal policy review next month. The best policy theme should be mercantilism and aggressive import substitution, as well as enhancing revenue collection measures in order to tap into the informal sector.

Import trade profile

The policy makers should sit down and analyse the import trade profile for the past half-year and identify all the substitutable products that are driving our import bill. Import duty should be applied to all such products, whilst at the same time reviving the local industry to sustain local demand. Import duty can also be jointly applied with tariff rate quotas for other products. Imports should only be left for essentials products that we cannot locally produce or that drive the economy; such as fuel, raw materials and capital goods.

The coming finance minister should also scrap duties on raw materials and capital goods. Manufacturers can then take advantage of the weak Rand to import raw materials and capital goods from South Africa, our main trading partner. This will help in the revival of local industries.

For meaningful industrial production to take place, the industrial policy has to be fully implemented by the new minister of industry and commerce; aggressive foreign investment sourcing should also be conducted by the investment promotion minister.

Trade deficit

The business environment will have to be addressed, with issues like labour laws, tax policy and other issues being fine-tuned. That will increase local capacity and competitiveness, which will drive exports up and help in wipe out the trade deficit.

In order to finance the looming budget deficit, the finance minister should introduce effective measures that tap into informal sector operators that are not currently paying taxes.