Published: 05 July 2018

ZIMBABWE needs to come up with fiscal devaluation measures if it is to ratify the African Continent Free Trade Area (AfCFTA) and operate competitively under the agreement, experts have warned.

Fiscal devaluation is the use of the tax system to mimic a nominal devaluation of the exchange rate, in particular by increasing taxes on imports and reducing them on exports, thereby changing the relative price of domestic and foreign goods.

Renowned economics professor, Tony Hawkins last week told a Zimbabwe National Chamber of Commerce (ZNCC) congress that while the country was moving to ratify AfCFTA, it was barely competitive to withstand the pressures associated with the agreement.

He highlighted that the only way for Zimbabwe to be competitive was to devalue Real Time Gross Settlement (RTGS) balances by at least 30 percent to match parallel market rates.

"Reforms for competitiveness and survival in the FTA will include currency devaluation, fiscal and monetary restraint and debt restructuring as part of a package to obtain foreign aid and loans," Hawkins said.

The continental agreement  which aims at paving way for a liberalised market for goods and services across Africa has already attracted criticism from market watchers who have cautioned that Zimbabwe's industry is not yet able to compete with cheaper imports from the region.

However, the renowned economist was quick to point out that most reforms include phasing out state controls to bring policy into line with commitments under FTA agreements that the country has signed.

"This will also help the country with the prevailing cash shortages. Generally, at the current macro-economic conditions, Zimbabwean companies don't stand a chance because trade is after all, war," Hawkins said.

Government should cut taxes that increase the cost of production  such as payroll or corporate income taxes and therefore also affect the cost of exports, financed by an increase in VAT (remembering that exports are zero-rated) or property taxes, he added.

"This route will bring with it short-term revenue losses even for a budget neutral tax reform and could pose an obstacle to countries with short-term fiscal constraints," he said.

Fitch Group member, BMI's senior operational risk analyst, Chiedza Madzima, concurred with Hawkins, adding Zimbabwe urgently needed fiscal devaluation.

"The over-liberalisation of 2009 is now back-firing. If government manages to devalue by at least 40 percent this would make local companies more competitive.

"Fiscal devaluation will give companies a chance because opening the borders without a plan at this moment will not do much for Zimbabwe despite all the advantages the FTA will bring," Madzima said.

Zimbabwe, which has been battling acute cash shortages compounded by a soaring black market, does not have a currency of its own and runs a multi-currency system dominated by the greenback and experts fear this will harm Zimbabwean companies buying cash at a premium to stay afloat.

This comes as international trade consultant Brian Mureverwi recently cautioned that Zimbabwe could lose $1,1 billion in potential tariff revenue if it ratifies the AfCFTA which president Emmerson Mnangagwa signed early this year in Kigali.

Pro-AfFTA economists argue the agreement could improve trade between African countries, which in 2016 estimates stated accounted for only 10 percent.

But for countries like Zimbabwe where production costs are generally high, the AfFTA could introduce fresh competition from cheaper imports and drive local companies out of business.

Zimbabwe - which introduced Statutory Instrument 64 of 2016 through striking some basics off the Open General Import License in a move to protect local industry - is yet to ratify the AfFTA.

The agreement is predicted to boost intra-African trade and if successful, it will be the biggest trade agreement since the formation of the World Trade Organisation in 1995.

By reducing barriers to trade, such as removing import duties and non-tariff barriers, African countries hope to boost intra-continental business.

However, local businesses maintain this will hurt Zimbabwe's infantile industry.

ZNCC chief executive Chris Mugaga weighed in pointing out that without fiscal devaluation it did not make sense for Zimbabwe to ratify the agreement which only needs 22 signatures by December to go into effect.

"As it stands, without fiscal devaluation local companies will bleed. Already, we have seen the bond notes disappear from the scene. How then, do we expect local companies to be competitive when they are scrambling for cash at a premium?" Mugaga asked.

Zimbabwe already has a long-standing bilateral trade agreement with South Africa which dates back to 1965 and preferential trade agreements with Namibia, Botswana and Zambia.

In 2008, Zimbabwe signed the SADC FTA but earlier on in 2000, Zimbabwe had become a member of the COMESA FTA and right now there are negotiations on the tripartite free trade area.
- fingaz