ZIMBABWE was one of the first members to join the Africa Continental Free Trade Area (AfCFTA) in 2018 and, subsequently, ratified the agreement in 2019.
The 2018 agreement establishing the AfCFTA set the overarching objective of creating a single market for goods and services through progressively eliminating tariff and non-tariff barriers across Africa.
Simply put, the AfCFTA seeks to answer questions such as — why is Sub-Saharan Africa exporting 90% of its cotton crop out of the continent instead of fully utilising Egypt and South Africa’s developed textile industries?
Why does Angola export most of its crude oil 12 400 kilometres in nautical distance to China and yet Zimbabwe, just 1 500 kilometres away, ends up importing most of its fuel from East Asia?
At the core of what the AfCFTA seeks to attain is the understanding that boosting intra-African trade will spur industrialiasation and economic growth, lifting as much as 50 million Africans out of extreme poverty, according to the World Bank.
African countries need to trade more with other countries within the continent. For this to materialise, countries under the AfCFTA have committed to progressively eliminate tariff and non-tariff barriers that currently constrain Intra-African trade.
Tariff barriers are taxes that are imposed by governments on the imports of goods, ideally to protect certain industries within a country and also earn revenue for the government.
These can take the form of certain customs duties, excise and Value Added tax that can be imposed on imports. Non-tariff barriers, on the other hand, are obstacles to international trade such as import/export licences, sanctions, customs delays and any other systems or circumstances within a country that prevent or impede the competitiveness of its businesses for international trade.
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The specific market conditions prevailing in any given African country cultivate certain non-tarriff barriers to trade, which are unique to that geography.
The AfCFTA has produced a clear roadmap to addressing tariff barriers through a phased approach where 90% of the tariffs will be eliminated in the first five years (2021–2025), 7% in the next 10 years (2026–2035) and 3% of the tariffs will remain protected.
Arguably, when it comes to addressing non-tarriff barriers, each participating country will carry the responsibility of appropriately identifying and addressing its country-specific obstacles to competitive trade.
The focus now goes down to the ability of each participating country to put in place measures to cultivate the comparative advantages necessary to strategically position their nations as major winners in this free trade area.
In simpler terms, the pertinent question cast upon us is — what should we do as a nation to ensure Zimbabwe’s trade and industry architecture are favourably configured to benefit the nation in the advent of the AfCFTA?
The below major non-tarriff barriers urgently need to be addressed, particularly by government, to position Zimbabwe as a major beneficiary of the AfCFTA.
The energy crisis
A 50 kilogramme bag of cement in Zambia costs approximately US$6,50 while the same costs around US$10 in Zimbabwe. In any typical energy intensive sector, the cost of energy is a critical factor in determining what the selling price of the end-product will be.
The higher the cost of energy, the higher the cost of cement, the less competitive locally produced cement will be once the borders open pursuant to the AfCFTA.
The effective cost of energy in Zimbabwe does not only include the tariffs as charged by the Zimbabwe Electricity Transmission and Distribution Company (ZETDC) but also encompasses the costs of alternative energy used during power outages such as diesel generator running costs.
As per below table, the energy standard tariff per Kilowatt-Hour (kwH) and the diesel pump prices in Zimbabwe compare unfavourably to Zambia and South Africa, its two major regional trading partners.
The situation is then compounded by the energy generation deficit. Zimbabwe’s peak demand is currently at 2 000 Megawatts (MW), while the Zimbabwe Power Company’s daily power generation update as at August 9, 2024, highlights that the nation is only producing 1,367MW.
The World Bank estimates that Zimbabwe’s power shortages cost the country a total of 6,1% of its Gross Domestic Product (GDP) per annum, equivalent to approximately US$1,6 billion per annum when 2023 GDP numbers are applied.
Zimbabwe’s manufacturing, mining and agriculture sectors may struggle to compete effectively with regional counterparts, who have lower energy costs once the borders start opening from 2025 onwards.
Limited private sector participation in the power generation space has created monopolised electricity, leaving industry and consumers to bear the brunt of financial and operational inefficiencies of Zimbabwe’s state-owned energy companies.
Admittedly, there has been notable effort and progress in energy generation investments post 2018, particularly the commissioning of Hwange Thermal Power Stations Unit 7 and 8.
Nonetheless, notable efforts still need to be invested in turning around the financial performance of power utility companies, foster growth of private power generation and accelerate the much-needed energy transition to greener forms of energy.
High tax burden
At 25,75%, the corporate income tax rate of Zimbabwe compares favourably with regional counterparts (South Africa 27%, Mozambique 32% and Zambia 30%).
However, the aggregate effect of direct and indirect statutory tariffs results in a punitive effective tax rate, arguably higher than regional averages, that stifles enterprise growth.
Notably, the 2% Intermediated Money Transfer Tax (IMTT) that applies on all transactions within the formal banking system is a topical issue which authorities must promptly address. As the AfCFTA fully rolls out in its implementation, regularisation of the informal sector is crucial to grow the value-adding sectors of the economy and channel more liquidity to the formal banking systems.
As it stands, there is really not much incentive for the various small businesses in the Mbare, Magaba area in Harare or those in the Makokoba area of Bulawayo to register as formal businesses, which channel funds through the banking system knowing that US$1 000 in the bank is effectively worth less than US$980 after IMTT and bank charges.
The fact that this IMTT is not tax deductible for income tax purposes puts a final nail in the coffin for any formalisation prospects that unregistered enterprises may have.
While broader engagements between industry and authorities continue on reducing or scrapping the IMTT, the Ministry of Finance and Investment Promotion is implored to, in the interim, concede to requests for tax deductibility of this IMTT.
A plethora of other direct and indirect taxes such as the Special Surtax on Sugar Content, at its high current charge level of US$0,001 per gram of sugar, make Zimbabwe a high tax jurisdiction and prone to product price undercutting from foreign competitors as the borders open pursuant to the rollout of the AfCFTA.
Ailing rail infrastructure
The Harare-Mutare and Harare-Beitbridge highways offer critical links to Mozambican and South African markets. Notable work has been invested in these roads over the last years, offering heavy duty haulage trucks carrying inbound and outbound cargo smoother and faster movement.
These are laudable developments, but high volumes of haulage trucks carrying shipping containers on these Zimbabwean roads is an unwitting sign of an ailing railway system, which should have been supporting such cargo shipments.
The cost of shipping via rail can be 50% lower than road freight. A United Nations World Institute for Development Economics Research study estimates a cost of US$0,07 per tonne kilometre for road freight in Zimbabwe, while the National Railways of Zimbabwe (NRZ) is reportedly charging between US$0,025 and US$0,05 per tonne kilometre.
These numbers justify greater focus on the planned resuscitation of the ailing state-owned company whose effective operation will cut operating costs for businesses and result in more competitive pricing of products within the market.
These focus areas discussed are critical for Zimbabwean businesses to compete well in the advent of the AfCFTA. Evidently, Government’s thrust in addressing these areas will determine the extent to which the nation will benefit from the free trade area’s impacts.
The onus is also on captains of industry to appropriately improve business process efficiencies, increase capacity utilisation and actively seek and develop new markets as the AfCFTA rolls out.
- Mukosi is a chartered accountant and a member of the Institute of Chartered Accountants of Zimbabwe. He did his articles with one of the ‘Big Four’ audit and accounting firms and is a seasoned finance and corporate strategy professional with considerable experience in the FMCG sector. He writes in his personal capacity.
