Commentary 17th - 31st July, 09

There is growing anxiety among local manufacturers that the Comesa Customs Union is a platform to make Zambia a dumping ground for foreign goods given that Zambian industry is facing structural challenges that affect competitiveness. The success of success of Zambian manufacturers under the new arrangement largely depends on how speedily government harmonises various taxes to regional tax structures.

Harmonizing the taxes will not only see manufacturers become competitive under the new Comesa Customs Union but lead to capacity growth, full utilization of raw materials, internalization of the production of all products, job creation and economic growth. As at now, companies already import some of the products they can produce locally because it is cheaper even with existing capacity.

As things stand now, manufacturers are unlikely going to leverage on the incentives of the Comesa Customs union as they buy raw materials from the same sub-region with more or less similar cost structures but excise duty in particular makes the difference between what is produced and what companies compete against.

It should however, be appreciated that the Ministry of Finance and National Planning has so far shown a high level of understanding on issues of excise duty harmonisation. The government is not reactive any more on various challenges affecting the industry but pro-active and highly understanding and we are confident these issues will be sorted out sooner than later. For example, Government has made the first step towards harmonizing excise duty on clear beer in this year’s budget from 75% to 60% so as to reach the regional levels of 40%.

In general terms, a number of issues still need to be addressed before we fully engage into the CU as a country. There is need to address issues like labour costs, cost of capital or interest rates which are critical factors affecting the competitiveness of the final products. You cannot have two companies accessing capital on two different (US dollar) interest rates and you expect them to fairly compete against each other under a free trade zone.

We also need to address the issue of tax incentives that support companies exporting outside Zambia. South African companies have export incentives on defined thresholds coming by way of corporate tax incentives and this should apply here as well.

There is also the issue of installed capacity and utilization if we are looking at how Zambian companies can increase their export volumes in the region. Utilisation levels of production capacity in Zambia are very low. Generally, companies that succeed on the export market should have a significant market share locally. It is a strong domestic base that triggers exports. Installed capacity must first of all satisfy the local market before exporting. If at 60 percent capacity you are able to satisfy the domestic market, then you should use the remaining capacity to go into exports. Unfortunately, most companies are not able to satisfy the local market even with half the capacity owing to high cost structures and low demand such that any additional output will require a heavy injection of capital, which remains very expensive. In other words, we already have an operational challenge even before we consider the customs union. In any case, we need to first of all establish which products we will be exporting as a country.

There is also the issue of accessing cheap raw materials as these will attract no duties. The challenge is that Zambia has limited capacity to convert raw materials into finished products. We are on the contrary a net exporter of raw materials and we run the risk of dis-industrializing (such that even Zimbabwe with its weak economy at present can out-compete us). Just now, there is the issue of milk products as it appears milk imports from Zimbabwe are cheaper than what we produce locally.

In summary; we are exposing many local companies on a challenging platform as many of them face numerous barriers to competitiveness such as lack of affordable working capital, limited access to international lines of credit now arising from the global credit crunch, high input costs such as labour, slowing demand, and low capacity utilisation.

There are other constraints affecting production among local companies and these are rendering the products uncompetitive. These involve poor infrastructure and communications connectivity. Perhaps this gives the more reason to lower the cost associated with the International gateway. Otherwise, we already run the risk of competing with low-cost imports from South Africa, which is not a member of Comesa.