US$57m lost in dodgy American trade

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ZIMBABWE was prejudiced of more than US$57,2 million through extortionately priced imports and underinvoiced exports to the United States between 2000 to 2005, a new study reveals.Much of the losses — US$29,4 million — were mainly through unreasonably high imports. The prejudice caused by undervalued exports was assessed at US$27,8 million.

There are fears that Zimbabwe, like many other African countries, could have lost huge sums through misinvoicing — a practice where importers charge prices that cannot be considered as reasonable when compared to world averages; and also when exports are suspiciously discounted — by trading partners.

Last year, the US, which bought Zimbabwean goods worth more than US$67,2 million, was the country’s seventh-largest export destination.

The study was done by American academics Ms Maria de Boyrie, Associate Professor of Finance at the New Mexico State University; Mr James Nelson, Associate Professor of Information Systems at the same instiution; and Mr Simon Pak, Associate Professor of Finance at Penn State University.

Through analysing the price of imports into Africa relative to the highest prices on world markets, including prices paid for imports from the continent relative to obtaining world prices, the study was able to conclude that the anomalies suggested something dodgy about the trade deals.

The report does not explain the reasons behind the inflated price of imports from the US, but asserts that this is often done to hide illegal commissions or fund transfers.

Conversely, underinvoicing imports is believed to be a deliberate strategy of reducing import duties and restrictions, dumping goods produced below market prices in order to drive out competition, and also smuggling goods into country without paying taxes and fees.

It is also agreed that both inflated imports and under-invoiced exports have driven most African countries, Zimbabwe included, into a debt trap, especially where the affected countries resort to external borrowings in order to compensate for the decline in foreign exchange earnings.

“Under and over-invoicing of imports and exports may occur for many reasons. However, one can ascertain that trade misinvoicing reduces foreign exchange reserves which may, in turn, increase the amount of external borrowing needed to finance development expenditures.

“In order to deal with this problem, countries may be faced with having to devalue their currency, which in turn may cause a reduction of domestic savings required for financing domestic investment and hence reducing future growth potential.

“In summary, trade misinvoicing represents a potential loss of economic growth and development, can account for persistent balance of payments deficits, and erodes the domestic tax base, affecting income redistribution as well,” says the report.

The research provides some of the pieces to the puzzle development economists have been trying to solve for a long time: why many resource-rich countries are poor. Much of the statistics used to draw conclusions of the dodgy trade figures were from the United States census bureau, which is considered to be relatively reliable.

Over the six-year period the study was undertaken, Zimbabwe exported goods worth more than US$533 million to the US. Imports were measured at US$267,5 million. Despite the positive trade balance of US$267, imports may have been inflated by more than US$29 million, while exports were undervalued by US$27,8 million.

In essence, the figures suggest Zimbabwe suffered illicit financial outflows of more than US$57 million.

As most of the goods that are often under-invoiced include precious stones, silver and platinum, chemicals and allied products, works of art, and mineral products, there is growing concern that Zimbabwe is not getting the maximum possible value from its resources.

“From this, we can infer that some exporters from countries such as Uganda, Liberia, Zimbabwe, Guinea, Congo (Kinshasa), Tanzania and Senegal are more interested in using high priced imports to possibly conceal illegal commissions or to export capital through associates in the US,” adds the report.

Zimbabwe largely exports goods in raw and semi-raw form. For example, of the 400 million euro (US$440 million) worth of products shipped to Europe last year, the bulk — 187 million euro (US$205 million) — consisted foodstuffs, beverages and tobacco, followed by vegetables at 67 million euros (US$74 million). Base metals fetched 62 million euros (US$68,2 million).

As in Zimbabwe, the scale of the financial prejudice in questionable deals between African countries and the US is huge.

Capital flows from all African countries in the review period topped US$20 billion, with South Africa — the continent’s second-biggest economy — was the most affected at US$7 billion.

What mainly drove researchers to conclude that African countries were being deliberately fleeced were anomalies observed in South Africa between 1990 and 1994 when the government introduced the General Export Incentive Scheme to encourage exporters.

After the incentive was introduced, there was an increase in cases of over-invoicing exports, but immediately after the scheme was phased out, exports began to be under-invoiced.

Analysts say governments can better trace misinvoicing by using a price filter matrix, where the price of both exports and imports are compared to benchmark international prices.

Where prices are markedly above the highest prices on the international market and vise versa this, the researchers note, suggests misinvoicing.

There were curious cases of overinvoicing in Nigeria, Africa’s biggest economy, in November 2005 where some golf clubs were imported for US$5 000 compared to the world median price of US$82. That same month, a power generator was imported at a cost of US$3 800 against a world median price of US$63.

It gets worse.

An electric hair dryer that was imported into Nigeria for US$3 800, while prices quoted elsewhere around the world did not exceed US$25. Overall, the revelations in the latest report leaves room for interpreting the scale of prejudice that African countries in general and Zimbabwe in particular realise in trading with its partners. Experts are now increasingly focusing on the damaging effects of illicit financial flows from and for African countries, and there are now heightened efforts to contain the abuses.

A recent study conducted by an independent expert and submitted to the United Nations Human Rights Council noted that tax-related illicit financial flows, in particular tax evasion and avoidance by transnational corporations, deprives governments of resources to progressively realise human rights, including economic, social and cultural rights.

It is hoped that increased awareness surrounding dodgy deals and tax avasion and avoidance will help governments activate their systems and better monitor cross border financial transactions.

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