• Change in VAT Status: The alteration of Zimbabwe's VAT from zero-rated to exempt has created significant financial burdens for businesses
• Porous Borders: The permeability of Zimbabwe's borders has facilitated the influx of low-quality, inexpensive imports, undermining local industries
• Taxation Pressures: A stringent tax regime, including high export retention taxes and the introduction of new regulatory challenges, has stifled business growth

Harare- The year 2024 proved to be exceptionally challenging for both developed and developing nations. Zimbabwe experienced its most severe drought in over four decades, exacerbated by the ongoing geopolitical tensions stemming from the deepening Russia-Ukraine war and the emergence of hostilities between Israel and Hamas.

These wars had significant repercussions on global commodity markets, particularly affecting metals, which are critical to various economic sectors in Africa.

While gold prices surged, platinum group metals (PGMs) and lithium faced substantial declines, leading to ripple effects on inflationary pressures and global economic fragmentation, ultimately compelling nations to bolster support for local enterprises, though that wasn’t the case for Zimbabwe.

In Zimbabwe, however, the situation was compounded by pre-existing structural issues, including a stringent tax regime characterized by a 25% export retention tax and persistent electricity shortages. The government’s response to the economic climate was to introduce an array of new regulatory challenges while exacerbating existing ones.

Key developments included a transition in VAT status, a worsening border crisis impacting trade, and the introduction of a controversial new currency, the Zimbabwe Gold (ZiG), criticized as another potential Ponzi scheme.

One of the pivotal functions of the government is to establish an enabling environment for commercial enterprises to thrive. Zimbabwe has consistently ranked low on the business index spectrum. According to the 2019 Global Competitiveness Report disseminated by the World Economic Forum, Zimbabwe achieved a score of 44.24 out of 100.

The Competitiveness Index for Zimbabwe averaged 12.37 points from 2007 to 2019, peaking at 44.24 points in 2019 and reaching a nadir of 2.77 points in 2010.

The Global Competitiveness Index (GCI) ranges from 1 to 100, where a higher average score signifies a greater degree of competitiveness.

The government revised the Indigenisation and Economic Empowerment Act (2008) to eliminate the majority indigenisation threshold, except for the sectors involving diamonds and platinum. The proposed amendments restricted the 51/49% indigenisation requirement to solely these two minerals. This legislative change is one of the factors that contributed to the uptick in competitiveness in 2019.

However, within the domestic market, enterprises continue to grapple with policy volatility, the influx of inexpensive imported commodities, and other systemic issues that have become endemic, such as power shortages and prohibitive taxation frameworks.

 A significant challenge confronting manufacturers and businesses alike has been the alteration of Value Added Tax (VAT) status from zero-rated to exempt. Zero-rated VAT pertains to a category of goods and services taxed at a rate of 0%, allowing businesses to reclaim VAT on their inputs.

Conversely, exempt VAT applies to goods and services that are entirely outside the purview of VAT, preventing businesses from recovering any input VAT on exempt transactions.

Zero-rated VAT facilitates input tax recovery, while exempt status imposes financial burdens on businesses handling exempt goods or services. The exemption of VAT poses several critical challenges for companies, primarily by exacerbating their cost structures.

A significant repercussion is the inability to reclaim input tax credits associated with exempt goods and services, compelling businesses to absorb these costs entirely. This results in heightened overall production expenses, which compress profit margins and undermine financial viability.

This issue has been illustrated by the performance of Hippo Valley, the largest sugar producer, whose market share has declined to approximately 50% from a previous high of 53%.

National Foods, the largest food producer, and Innscor, the leading food processor, have similarly experienced depressed margins, particularly in the rice category. Tendai Masawi, CEO of Hippo, has emphasized the necessity to rectify this situation and restore VAT to zero-rating.

The influx of low-cost imported goods complicates pricing strategies further. To mitigate rising costs, firms may feel compelled to elevate pricing models for exempt products. However, this could trigger a price elasticity dilemma, where consumers, sensitive to pricing changes, may reduce their demand.

Consequently, this pricing pressure could detrimentally affect sales volumes and overall revenue streams. A comparable situation was observed with CAFA, which experienced rising sales volumes but declining prices, as well as National Foods, which reduced prices to stimulate demand while incurring additional costs.

This situation implies that businesses dealing in exempt goods may find themselves at a competitive disadvantage compared to those engaged in zero-rated transactions, which can leverage input VAT recovery mechanisms. This disparity creates an uneven playing field, potentially distorting competitive dynamics within the sector.

Ultimately, cash flow management becomes increasingly precarious under an exempt VAT regime. The absence of input VAT recovery can lead to substantial liquidity constraints, particularly for firms with significant operational expenditures, such as those in the sugar and manufacturing sectors.

This liquidity squeeze may impede their capacity to finance working capital needs or invest in growth initiatives, thereby stifling operational efficiency and strategic expansion.

It is imperative for the government to address this taxation issue to alleviate pressure on tax-paying companies, which significantly contribute to the national fiscus through Zimbabwe Revenue Authority (ZIMRA) taxes. 

Another pressing economic challenge driving many businesses to the brink is the issue of porous borders. Zimbabwe’s borders are permeable, facilitating the importation of subpar goods that often evade duty and are of inferior quality. This has become a challenge affecting retailers, industrial firms, and even retail outlets selling apparel.

In 2024, more than 16 substandard sugar brands were imported, fetching a lower price driving Hippo Valley and Star Africa Corporation out of competition. Hippo employs over 16 000 people the second biggest employer from government.

In the industrial sector, companies like Zimplow are suffering significantly due to the influx of outdated second-hand trucks from India and China. These trucks predominantly feature two-tier engines, with only a few having tier-three engines, contrasting sharply with Zimplow’s Scania brand, which utilizes tier-four engines.

These imported trucks command lower prices, creating an uneven competitive landscape. Many of these vehicles evade taxation, further undercutting local competitors who comply with tax obligations.

There is an urgent need to implement road-worthiness tests for these trucks to protect local industries that adhere to regulatory standards. Due to these factors and associated stability concerns, Zimplow reported its first loss in over five years.

The situation is even more dire for food and apparel retailers. Imported clothing and food items from neighboring countries and Dubai are being sold at half the prices offered by established retailers. This has led to struggles for companies like OK Zimbabwe to break even in 2023, along with the closures of some  Choppies shops, SPAR, Food World, Truworths, and Metro Peech and Brown.

Established retailers represent the second-largest employer after the government, employing approximately 20,000 individuals. A slowdown in business for these companies not only diminishes their contributions to the national fiscus but also exacerbates unemployment challenges.

Lastly, land allocation issues by the government have not sparred the properties sector, despite its booming nature. Zimbabwe’s houses are expensive compared to neighboring South Africa, though in South Africa are more lavish and astounding.  

The high cost of housing, including rental properties and home purchases however, largely attributed to the allocation of land to the land merchants by the government. These land merchants subsequently sell parcels at inflated prices to established property development firms, which then pass these costs onto consumers, inflating overall housing expenses.

This situation could be mitigated if the government directly sells land to established property and property development companies, such as Mashonaland Holdings to reduce accumulated costs in the building process. Over 1 million housing is required in Zimbabwe but even if the houses are there, the prices are unsustainable.

Therefore, the government should consider changing the VAT status to zero-rating, enhancing border controls to protect local industries, and reassessing certain taxes, particularly on lithium and PGMs, in light of low demand and prices.

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