Money laundering rife in the economy

Terence Zimwara

Zimbabwe could be a victim of money laundering by criminal syndicates seeking to ‘cleanse’ their dirty money and to evade government authorities in the region.

Organized criminal syndicates are thought to be bringing in fast moving consumer goods (FMCG) as way of converting proceeds from their activities into the American greenback.

Zimbabwe predominantly uses the US dollar since it dollarized its economy about five years and in addition it has lax foreign exchange controls which make it easy for anyone to move huge amounts of cash without problems.

This makes the country a prime target for anyone seeking to acquire cash dollars to do so without the fear being traced.

The country main’s main industry body, the Confederation of Zimbabwe Industries (CZI) made this allegation when it appeared before the Finance and Budget Committee of the parliament.

President of the Mashonaland chapter of the CZI Mr Sifelani Jabangwe told the committee that they were still uncovering this and a full detailed report is yet to be made.

 “There is a belief  that some of the foreign products on the local market particularly, FMCGs are being sold at uneconomic prices by people seeking to access US dollars from Zimbabwe,” Mr Jabangwe.

He added that at his organisation’s various deliberation forums they concluded that it was impossible for some imported goods to sell below the cost of production of locally produced ones.

Mr Jabangwe told the committee that smuggling and money laundering could be the main reasons why imported products were seemingly outcompeting locals.

 The CZI, however acknowledges that the 40 percent deprecation of the rand against US dollar over the last 18 months could be another significant factor leading to Zimbabwean producers suddenly becoming uncompetitive.

Investigations by The Parade into some of the pricing of imported products seem to support allegations made by CZI that there could be money laundering at play.

We identified two similar products that seem to suggest that there are other forces at play. Unilever produces a 500g of margarine (Stork Margarine) which is widely available in most retail outlets.

However of late there has been an influx of similar imported products like the 500g of Blue Band margarine which is now competing with established brands like the one mentioned above.

In one retail store we were shocked to learn that the Blue Band margarine sells for just one dollar while the locally produced ones were selling between $2.30 and $2.50, a staggering 150 percent price differential.

It is very difficult to understand how much of the price differences can be attributed to over pricing by local producers or smuggling by importing merchants.

Another example is that of boxed fruit juices. Schweppes Zimbabwe produces a two litre fruit juice soft drink which sells around $2 in most retail outlets. Interestingly there is now an imported version, Pure Joy made in South Africa which street vendors are selling for $1 while established retail outlets sell it at $1.50 or lower.

Again the pricing differentials seem to defy economic fundamentals in the case of the imported products.

An importer has to pay freight charges which are quite significant, he has to pay duties in addition to other costs that arise as a result of bringing the products into the country.

 Local products on the other hand, face no such extra costs in their production chain yet it is the imported products that are competing very well especially on the prices.

This where the charges of money laundering and smuggling are made and how this has devastated local producers.

During the question and answer session of the Budget and Finance committee, Bulawayo legislator Eddie Cross asked why Zimbabwean producers were uncompetitive.

Current CZI president, Charles Msipa responded by laying down a list problems that he said industry has faced not only since dollarisation but even before the multiple currency regime.

Chief among the problems include high cost of credit, infrastructure deficit, cost of labour that is unrelated to productivity and declining disposable incomes.

What is not clear from CZI is how much of this results in the price differences observed above. However the CZI boss did acknowledge something that has affected producers yet no one was in position to change it- was the depreciation of the rand.

“The rand has depreciated by almost 40 percent over the last 18 months and that means Zimbabwean companies have suddenly become uncompetitive by that much,” said Mr Msipa.

South African made products have become cheaper by virtue of the decline of their currency and this has made their products which are sometimes superior more appealing to consumers.

Zimbabwe cannot impose tariffs to counter this because the assumption is that market forces were responsible for the rand decline and the commitment the country has made with various regional trade blocs means nothing will be done.

Fake certificates used to smuggle goods into Zim- CZI

Terence Zimwara

Confederation of Zimbabwe Industries (CZI) is complaining that smuggling continues to be a threat to the survival of the few remaining manufacturers.

The CZI a lobby group for Zimbabwean producers repeated the same complaint when its leaders appeared before parliament recently with one of its officials suggesting smuggling was now being conducted via official channels.

Sifelani Javangwe raised the issue of faked certificates of origin that smugglers were easily obtaining in South Africa to facilitate the movement of goods into Zimbabwe with having to pay the relevant fees or penalties.

A certificate of origin is a document declaring in which country a commodity or good was manufactured. The certificate of origin contains information regarding the product's destination and country of export and is required by many treaty agreements before being accepted into another nation.

Since some countries limit or ban imports from certain countries altogether, all incoming goods would be required to have a certificate of origin. To encourage imports from specific nations, governments may lower the duty on goods if accompanied by a certificate of origin from those countries. 

However according oral given evidence given by CZI before the Finance and Budget committee of parliament, certain unscrupulous businessman were exploiting the lax system around the issuance of these certificates to import goods into the country.

“Once a certificate of origin is issued and once the South African Revenue Services (SARS) endorses the certificate by stamping it, Zimbabwe Revenue Authority is then forced treat the certificates as original,” said Mr Jabangwe.

He added that at the moment anyone (in South Africa) can issue such a certificate because there is no agreement between regional countries on the rules to ascertain the originality of these certificates and who issues such certificates.

Consequently, Zimbabwe has been at the mercy of smuggling cartels, which have brought everything from sweets to semi durable items like stereo systems or LED televisions.

A number of these products are not originating from neighbouring countries like South Africa or Zambia which are normally exempted from customs duties that apply to countries outside regional trading blocs.

Zimbabwe is a member of the SADC and the COMESA economic union. Countries in these trading blocs have standing agreements that allow for free passage of goods originating from inside member countries.

In order to evade the customs duties that will apply if the products are from outside the region, importers are resorting to using faked certificates that then give easy passage for their goods into Zimbabwe.

The net effect is that Zimbabwean producers will be forced to compete with products that enjoy subsidies in the country of origin and even products that do not meet local heath standards.

Such products create an unfair playing field, eventually driving out local products thus leading to job losses and a growing balance of trade deficit.

According Mr Jabangwe this is in violation of World Trade Organisation’s (WTO) standards on rule of origin in international trade.

Rules of origin are used to determine the country of origin of a product for purposes of international trade. There are two common types of rules of origin depending upon application, the preferential and non-preferential rules of origin.

Non-preferential rules of origin are used to determine the country of origin for certain purposes. These purposes may be for quotas, anti-dumping, anti-circumvention, statistics or origin labeling.

Preferential rules of origin are part of a free trade area or preferential trade arrangement which includes tariff concessions. These trade arrangements might be unilateral, bilateral or regional as is the case with COMESA and SADC.

 The rules of origin determine what products can benefit from the tariff concession or preference in order to avoid transshipment.

By forging certificates of origin, importers can benefit from trade concessions that naturally should be enjoyed by products that are made in countries that qualify for the concessions.

The CZI essentially sees this as a way of formalizing smuggling and the consequences of smuggling are quite apparent in the case of Zimbabwe. Smuggling distorts the entire production chain making difficult for producers to continue with operations.

In a parliamentary submission in November 2013, CZI at the time argued that there was abuse of COMESA and SADC certificates of origin to bring goods into the country.

CZI suggested to authorities then, to allocate a greater budget to the Zimbabwe Revenue Authority (ZIMRA) to specifically fund investigations into such activities.

No concrete steps have been taken to address this and in the meantime the economy continues to bleed as the recent events will show.

The economy is essentially now in deflation mode and according to Zimstats , the country trade deficit continues ( about $1 billion in the first quarter of 2014) to grow as imports to continue to flood the local market.

Government needs to take action to help local producers who employ thousands to remain afloat while elsewhere government has to work hard to convince international investors to come on board.

Dollarisation: The downside

 Terence Zimwara

There is no doubt that dollarization helped the Zimbabwean economy find its feet after years of decline. The use of multiple currencies particularly the American dollar has made it attractive even for foreign investors to consider pouring money into the country.

With inflation currently in the negative territories, the Zimbabwean economy offers some of the best returns on the dollar although the country risk remains an obstacle.

The last two years have not been great for the Zimbabwean economy however, national demand has been sliding while the current account deficit has reached unsustainable levels.

The use of international currencies has meant that the central bank has had little or no influence on where the economy is heading.

This has of course led to regular calls to reintroduce the Zimdollar and the government has consistently come out to say this will not happen anytime soon.

At the recent Zimbabwe International Trade Fair, a government official Mr Supa Mandiwanzira reiterated that the return of the currency was not imminent as had been speculated by some.

This followed both foreign and local media reports that the government was planning to re introduce the local currency as it tries to arrest the continued economy decline.

In this article, we will try to understand why there is an agitation for the Zimdollar’s return by mainly corporates and the reluctance to see this through by the general population.

Zimstats the country’s official statistical body recently reported a trade deficit of approximately $1 billion dollars in the first quarter of 2014 and indication that the appetite to import is not receding.

One has to walk through the pavements of Harare’s central business district to understand the problem from a layman’s viewpoint. The pavements literally packed with all kinds of imported goods ranging from foodstuffs to clothing and even semi durable items.

There is toothpaste, washing powder, fruits the list is endless suffice to say the same items are found in their abundance in retail outlets. Vendors and enterprising business people have suddenly started selling mainly South African made products at prices that beat locally made goods.

To illustrate a 500 gram pack of locally made margarine (Stock Margarine) costs about $2.5 in most stores yet there is an almost similar product which is being imported into the country and is sold for just $1 in some retail stores!

It is this staggering price differential that leaves one shaking their head, what exactly are the ingredients used in making margarine locally that makes it so expensive?

Local producers will claim that power shortages, high interest rates and a lack of credit lines raises the cost of production and in turn this local products uncompetitive.

Clearly there are no easy answers however, part of the problem also lies in the fluctuations of the currency of Zimbabwe’s major trading partner, South Africa.

The South African rand currency has performed poorly against major currencies particularly the US dollar. It has depreciated by some 37 percent since the end of 2012 and the effects on the Zimbabwean economy are now becoming apparent.

Suddenly it has now become lucrative for South African companies to sell on the Zimbabwean market than at home.

To illustrate, a loaf of bread sells for between 8 and 9 rand in SA while the same costs about $1. At the current exchange of U$1: 10 rand, then you would realize more by selling in the Zimbabwean market because the price would be 10 rands.

 Of course there are other hidden costs that may cancel out the extra arbitrage profit that can be realized in the case illustrated above. In reality however, there are quite a number of products where the price differences are so huge such that it would make economic sense to import.

While local businesses may find little motivation in importing, the same cannot be said of cross border traders and informal traders who have seized on the opportunities that the depreciating rand has presented.

These traders are selling everything from sweets to furniture and realizing profit as result of the depreciation of the rand. Two years ago this was not possible when the exchange rate was at just under US$1: 8 rand.

Due to the continued depressed value of the rand, local business leaders are now asking government to intervene by imposing heavy tariffs on imports in order to ‘protect local jobs’.

At a workshop organized by the Buy Zimbabwe lobby, players in the baking industry asked the government to intervene by way of banning imports of flour products.

A few business leaders if any have gone record and publicly called for the return of the Zimdollar however it is something that apparently is getting some consideration in the corridors of power.

For ordinary Zimbabweans, the return of the Zimdollar is certainly an unwelcome topic as evidenced by the recently reported panic withdrawal. This followed a report by Bloomberg Financial news service that the return of the Zimdollar was imminent.

The government is well aware of the demise of Zimdollar and what caused it. It is the continuing economic stagnation however that is pushing the government against the wall and this is notwithstanding the fact international donors remain unwilling to help.

The government finds itself in a conundrum, where either action has severe consequences not for it politically but in an economy sense as well.

It remains to be seen what course the government will take in light of all this.