Just over a week ago the government through its highest official, President Emmerson Mnangagwa announced a slew of measures that intended to restore confidence in the local currency and economy. These measures included a bank on bank lending, increased tax and levy on foreign currency transactions and increased taxation for short term investing. It was foreseeable that these policy decisions would toughen business conditions in the country with many relying on credit. In response to the reaction of the economy to the measures, the government has moved to reduce import tariffs on a list of basic commodities.
Regardless of how successful or profitable a company is cash flow is a different consideration. It’s about the timing of the money. One way to bridge cash flow gaps is with loans, which of course the measures stooped. The fallout was swift as companies such as sugar producer Tongaat-Hullet, a subsidiary of listed company Hippo Valley Estates, announced that they could not pay farmers for sugar cane as a result of the lending ban. Another listed company, Dairibord followed suit, this time cancelling a dividend payment to shareholders because they could not borrow the money. And it became clear very quickly that the lending ban might sooner cause the industry to come to a halt than achieve its objective of restoring confidence.
There were also exceptions instituted to the measures after the announcement. Particularly on tobacco loans which were to be considered as foreign drawdowns and later a few other agricultural commodities were added to the list. Not surprising, we have become accustomed to the chopping and changing of hastily assembled policies.
Despite the insistence by many officials in the government of Zimbabwe that local industry was doing better than ever the writing was on the wall. The week after the president’s speech many commodities started to disappear from store shelves and the market. The lack of credit would ultimately affect the industry capacity utilisation that the government has been beating its drum over.
More rules changed
On the 14th of May, the minister announced some changes to existing rules for the importation of basic commodities and the payment of farmers for grain deliveries. The statement caught much more attention for opening up the importation of basic commodities but both its points merit some conversation.
Improving access to basic commodities
Thanks to a follow-up letter to Ms R Chinamasa, the acting Commissioner-General of Zimra we know what is included on the list of these basic commodities namely; rice, flour, cooking oil, margarine, salt, sugar, maize meal, milk powder, infants milk formula, tea (including flavoured ), petroleum jelly, toothpaste, bath soap, laundry bar and washing powder. Without access to credit, producers are hamstrung and anyone with the ability to import will quickly opt for importing over making arrangements with local manufacturers. The reduction of import duty is for 6 months. The other problem is of course that imports demand foreign currency, much more than domestic products. This brings us to the second rule change.
Incentivising early delivery of Grain to the GMB
The Minister of Finance also announced that a new payment structure was devised to encourage farmers to bring maize to the GMB. The government would pay 30% of the amount due in US Dollars and the remaining 70% in Zimbabwean dollars. If we treat the farmers as exporters their foreign currency retention rate would be only 30%. The remaining 70% would be paid at the willing buyer willing seller (such a mouthful, we prefer interbank) rate. The obvious questions come up such as why are local farmers being paid only 30% in US dollars while imported maize would get 100% in US dollars? The other problem it creates is individuals with huge amounts of Zimbabweans who would prefer to offload very quickly and turn to the parallel market which would likely depreciate the Zimbabwean dollar further.
The current thrust by the government is questionable at best. The policies are creating bigger problems than the problems they are instituted to solve. Rushing out the policies is bad enough, chopping and changing the policies thereafter only adds insult to injury.