FTA challenges for Zim

annapurna516tistorycom0170635125028853560301Business Reporter
THE launch of a Free Trade Agreement by three African economic blocs in Egypt recently was indeed an important step towards a potentially game-changing common market spanning the entire African continent. Already under implementation, the deal between the East African Community, Southern African Development Community and the Common Market for Eastern and Southern Africa will create a market of 26 countries with a population of 625 million and gross domestic product of more than $1 trillion.

For Zimbabwe, the continental free trade presents both opportunities and challenges. The opportunities are the creation of bigger market access, which will see Zimbabwe accessing 625 million people with GDP of $1,3 trillion. This is significant considering that Zimbabwe has a population of about 13 million people and the GDP of only $13,5 billion.

All things being equal, local firms should brace for big business, but this is easier said than done. Certainly, there are challenges, which come with this arrangement such as loss of fiscal revenue, stiff competition and potential problems of unemployment.

Zimbabwe at this juncture cannot benefit from this free trade agreement. Already, the country has been relegated to being a nation of consumers and heavily relies on imported products because of low productivity. For instance, South Africa alone takes more than 60 percent of shelf space in the domestic supermarkets.

As such, this makes it difficult to compete with producers or businesses from the whole African continent if the country cannot compete within the SADC region.

The two fundamental challenges that could inhibit Zimbabwe from benefiting from the free trade agreements are lack of competitiveness which have negatively affected productivity.

“We don’t have capacity to sell locally and let alone to export. It is very difficult to imagine that we can tap into the 625 million people in Africa when we cannot supply to 13 million,” economist and trade expert Dr Gift Mugano said.

“The reality is that we will soon be swept away by the wave of regionalism and become a warehouse of the global economy. Zimbabwe needs to move swiftly to identify the deterring factors in raising production capacity. This much we know but we now need to collectively move to identify problems which require money to be solved and separate them from ones which require policy reforms.”

He said the challenges of low agricultural productivity were to do with incentives and policy issues.

For instance, on policy issues, the Government needs to give title deeds to farmers, which can be used as security when seeking finance from the banks. This on its own would unlock finance and transfer the burden from the Government to the markets.

In the same vein, the institutions established to support economic programmes like the Commodities Exchange must be operationalised. In 2011, Zimbabwe launched the Commodities Exchange which was supposed to be a mechanism for raising agricultural productivity by addressing efficiency in production, reducing post-harvest losses and bridging the financial gaps through the use of warehouse receipts as instruments which can be used by the bank as col- lateral.

“To date, there is no movement on this issue. This then creates a fundamental challenge and one needs to understand why we establish these institutions,” Dr Mugano said.

With respect to incentives, economic analysts say the Government should consider introducing tax incentives aimed at supporting value chains and cluster initiatives. This was a complex task, but to make the issue simple, one could look at how procurement by the supermarkets could be localised through contract farming or direct purchases. But this must be enforced by a carrot and stick approach. On the carrot side, Government would give tax reductions such as corporate tax for a complying company.

“Naturally, this normally receives resistance from the Ministry of Finance but the business case is that the value chain process if applied will widen the tax base and ends up give the Treasury more money,” said one analyst.

“On the stick side, tax disincentives will have to be applied for non-complying companies. This is what they are doing in Africa, like in Zambia and South Africa. This approach will definitely raise productivity but requires policy reforms, not money. The money is already available as supermarkets are using it to import. We must direct it into the economy.”

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