Coming from the backdrop of an economically turbulent 2019, in which the manufacturing sector grew at only 2.4%, the Zambia Association of Manufacturers (ZAM) anticipates that growth in the sector will continue to decline in 2020, given the tough macroeconomic environment that ensued into the year. For instance, a strongly depreciated kwacha averaging K18.5 in 2020 to US$1, has largely increased input costs and affected business planning. Increased inflation which reached a high of 16.6% in May 2020, has also made the purchase of local raw materials costly. Thus, ZAM’s first expectation of the 2021 budget is that the Government shall craft a budget that restores general macroeconomic stability through an appreciated exchange rate and reduced inflation rate to enhance growth in the economy.
Worse still for 2020, the anticipated negative effects of the Corona Virus Disease (COVID-19) will continue to affect the manufacturing sector for some time to come. The Bank of Zambia’s quarterly survey on business opinions and expectations revealed that in the second quarter of 2020, the negative impact of the COVID-19 pandemic resulted in subdued consumer demand especially for non-essential commodities, amidst tight liquidity conditions, high energy prices and electricity load shedding. As a result of this, manufacturing production was sporadic, as the pandemic disrupted supply chains and companies continued to struggle to acquire inputs for production. ZAM therefore, expects the 2021 Budget to address the effects of the COVID-19 pandemic through provision of more medium to long term stimulus facilities. Such as, use of the Development Bank of Zambia (DBZ) as the disburser of the stimulus package. DBZ’s interest rates are lower and repayment tenors longer.
Further, Zambia’s public debt position has deteriorated, causing the Government to reduce its payments towards non-debt and non-wage related expenditures. However, reduced payments to other expenditure, has resulted into accrued domestic arrears and long overdue Value Added Tax (VAT) refunds. Lack of payments to local suppliers of goods and services and withheld VAT refunds have substantially burdened the production costs and eroded competitive pricing as manufacturing companies have had to obtain expensive debt to cover their liquidity shortfalls. Ultimately, reinvestment capital and business growth have been undermined, limiting the contribution by manufacturing companies to corporate income taxes (CIT), VAT and Pay As You Earn taxes (PAYE). Thus, in the 2021 Budget, much as the Government will be clearing its external debt stock, it should find a balance and commit to clearing out both its domestic and VAT arrears. Clearing of domestic arrears has been a persistent line in previous budgets, but the lack of commitment by Government to undertake these payments does not make a case for domestic growth. To restore growth, the budget size allocated to clearing arrears should be commensurate with the accumulated growth in arrears and should be paid out.
The number of business licences required to undertake business in Zambia, the increased number of electricity load management hours and the increased wage costs due to the Employment Code of 2019 among others, make production costs very high in the country. ZAM’s examination of the National Industrialisation Policy (NIP) and the National Trade Policy (NTP), demonstrates that Government aspirations for industrialsation and trade are divergent to the current reality. As the annual implementation tool for the Government, ZAM expects that the 2021 Budget will commit to reducing the costs of businesses through rationalising, collapsing and reducing the number of business licenses and extending the exceptions made on the payment of conditions of service for the duration of the COVID-19 on the Employment code.
Zambia’s manufacturing CIT rate, at 35%, is much higher than agriculture at 10% and incomparable to some CIT rates in the region. For instance, Kenya reduced its CIT rate from 30% to 25% in 2019, Namibia from 35% to 32% in 2017 and Botswana from 25% to 22% in 2017. Moreover, in Botswana, manufacturing companies can, through the approval of the Minister of Finance, apply for a special tax rate of 15% in the realisation that the manufacturing sector is a good candidate for creation of decent employment and can attract investment into the country.
Though Zambia’s manufacturing sector has been crying for reduced CIT rates in budgets past, this request has not been granted. Manufacturing CIT at 35% is too high threatening the growth of the manufacturing sector, especially with the outbreak of COVID-19. In ZAM’s perception, the COVID-19 pandemic creates an opportunity for Government to attract better investment into the manufacturing sector by reducing the CIT rate from 35% to 25%. The Government should also in the 2021 Budget grant manufacturers who invest US$500,000 and above in priority products and those that invest into the Multi Facility Economic Zone (MFEZ) a lower CIT rate of 15% to enhance Zambia’s growth trajectory.
Additionally, various custom duties and excise duty rates on certain raw materials remain high and debar local value addition. Raw materials such as acrylic fibre at 15% duty, sheet steel at 25% duty, palm stearin at 15% duty, filler master batch at 5%, and bulk milk powder for further processing at 15% among others, should be removed or reduced to 5%. Besides the high excise duty rate on imported ethanol of 125% should be reduced to 60% while the excise duty rate on alcohol made from malt should be reduced from 40% to 30%.
ZAM also expects the Government to take the first step in the actualisation of the Proudly Zambian campaign by buying locally manufactured goods. Government potentially remains the biggest ready market of locally produced goods. For instance, the garments and leather sector has declined in recent years growing at -3.5% in 2019, due to increased imports from the far East and the UK. Yet, the Government could easily boost this subsector through the purchase of uniforms and boots for its military operations. Hence, we expect the Government to be the first to buy Zambian made products and demonstrate their pride in their manufacturing sector. ZAM also expects, the 2021 budget to express its intentions to move the Local Content Strategy (LCS) policy into law and to also include prioritisation of local procurement into the Zambia Public Procurement Agency (ZPPA) Act by suspending open bidding. ZAM believes this will stimulate local demand and increase manufacturing productivity and support local employment.
Cardinal for business operations in 2021, will be the reintroduction of the Duty Drawback Scheme for exporting manufactures as well as the lengthening of the period required to produce export documentation from 3 to 4 months on VAT rule 18. Zambia’s nontraditional exports have been reducing because of the impact of such schemes. Moreover, the provisions of SI 90 on diesel remains and tremendously affecting productions costs. Thus, ZAM expects a removal on the threshold of claims on diesel. ZAM also expects renewed vigour in the fight against illicit trade which continues to affect the local manufacturing sector. Faced with unfair competition from cheap imports that are non-tax compliant thereby tend to be cheaper and make it hard for legal commodities to remain competitive on the domestic market.
ZAM’s expectations stem from the fact that the manufacturing sector is a very important sector for Zambia’s industrialisation, job creation and economic development and as Government’s partner for development, the sector should continue to be given the importance it deserves in driving the development agenda in 2021 and beyond.
