The Sunday News
Butler Tambo Economic Focus
Continued from last week –Unpacking Zim Asset
POLICY inconsistencies and contradictory statements from Government officials have also made doing business in Zimbabwe a nightmare.
Proper institutions need to be put in place which can aid investors to know the true picture of the opportunities in Zimbabwe and not a situation where investors’ businesses are threatened with closure overnight and the next morning the same sentiments are reversed.
The role of institutions goes beyond the legal framework. Government’s attitude towards markets and freedoms and the efficiency of its operations are also very important: excessive bureaucracy and red tape, overregulation, corruption, dishonesty in dealing with public contracts, lack of transparency and trustworthiness, and political dependence of the judicial system impose significant economic costs to businesses and slow the process of economic development.
Zimbabwe was ranked lowly at 171 out of 183 countries by the World Bank Global Competitiveness Report of 2011.
This was against better scores for countries such as South Africa ranked at 35, Botswana-54, Zambia-84, Swaziland-124 and Malawi-145.
According to the World Bank’s Doing Business 2013 Indicators, Zimbabwe slipped from a ranking of 157 out of 185 countries in 2011 to 173 in 2012. Impediments to investment include limited resources and high cost of capital, dilapidated infrastructure, obsolete technologies, and power and water shortages.
Zimbabwe’s ranking in the World Economic Forum’s Global Competitiveness Index Report 2012/13 is 132 out of 144.
Protection of property rights continues to receive a weak assessment (ranked 137) and reduces the incentive for businesses to invest. The country’s poor credit rating (ranked 142) limits the capacity of the country to access offshore lines of credit. There is also need to upgrade overall infrastructure; the country ranked 123 in this area (African Development Bank 2013).
The country’s low rankings reflect serious underlying challenges which range from policy to regulatory and operational issues. Stringent requirements for investors are also seen for instance when one considers that starting a new business in Zimbabwe takes very long (144 days) when compared to regional countries norms of say eight days in Rwanda. All these hiccups are a deterrent for any serious investor and as long as Zimbabwe does not improve on such fundamentals it can kiss goodbye to foreign direct investment (FDI).
Foreign Direct Investment to Zimbabwe and its challenges
- Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.
- It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments.
At independence in 1980, the new Government adopted a highly controlled and inward looking economy.
Foreign capital constituted about 70 percent of the total capital stock and FDI dominated foreign capital inflows (Clarke, 1980).
In the first 10 years of independence, the Government continued with highly interventionist economic policies inherited from the colonial regime. The business environment was highly regulated through a system of price controls, labour market restrictions and investment control procedures. Approvals of foreign investors’ proposals involved an excessively long process. Foreign firms were required to get permission from the Foreign Investment Centre for the development of any new enterprises in Zimbabwe.
Ownership restrictions in some sectors required at least 30 percent local participation in an enterprise. Policies on repatriation of profits also remained restrictive. Because of the policy environment, which was unfavourable to foreign investors, FDI inflows were very low during the first decade of independence (Gwenhamo 2009).
As the Government came to grips with persistently low levels of fixed capital formation in the late 1980s, the attitude and policies towards foreign investors began to change.
In 1989, a new investment code was adopted. The result was to increase the proportion of after-tax profits that multinational companies (MNCs) could repatriate from 50 percent to 100 percent. In 1990, Government adopted the IMF-funded Economic Structural Adjustment Programme (Esap) designed to eliminate economic policies of controls and restrictions. Promotion of FDI was one of the key areas and policy was designed to achieve increased inflows of FDI (ibid).
In 1992, as part of the structural reform, the Zimbabwe Investment Centre (ZIC) was established as a one stop shop for investment approvals. Tariffs and tax exemptions were also offered to encourage foreign capital investments, transfer of technology, the utilisation of local raw materials, the development of rural areas and the use of labour-intensive production techniques. Foreign firms geared towards exporting also benefited from the export processing zones incentives in the form of tax holidays and customs free trade. The return to a liberal economy and enthusiastic promotion of FDI resulted in the surge of FDI inflows averaging above $50 million per year between 1990 and 1997. In 1998, FDI inflows reached a record high of $444 million.
The sharp surge in FDI inflows in 1998 was partly driven by the privatisation and liberalisation wave in the Zimbabwean economy.
This saw substantial inflows of foreign capital particularly from South African firms into various sectors of the Zimbabwean economy.
In the late 1990s, the country began to experience political instability and macroeconomic imbalances. Investor confidence was further rattled in 2000 because of the land reform programme.
The sudden reversal of FDI inflows coupled with falling domestic investment had depressing effects on the gross fixed formation which fell from a record high of 25 percent of GDP in 1995 to only 17 percent of GDP by 2005.
For instance between January and June 2014, Zimbabwe attracted only $67 million compared to $165 million in the same period last year (Reserve Bank of Zimbabwe August 2014 Monetary Policy Statement).
In the 10 months to October 2014, the country received foreign direct investment (FDI) amounting to $146,6 million compared to $311,3 million during the same period in 2013, a marked decline of more than 50 percent.
Last year, Africa received FDI of over $82 billion with Mozambique getting $8 billion of it, that is, 10 percent of FDI inflows into Africa. Zambia receiving $8 billion in FDI between 1980 and 2013, Mozambique $16 billion but only $1,8 billion for Zimbabwe.
Zimbabwe, despite boasting abundance in natural resources like gold, diamonds, coal, platinum, nickel, copper, iron ore, you name it, we have it, has found the going tough in luring investors.
Sanctions and their Impact on Zimbabwean Economy and abilities to Access External Funding.
Zimbabwe has, over the past few years, received considerable adverse international media reports, as well as covert and overt alienation by some few countries, primarily on the back of the inevitable land reform programme the country implemented.
Sanctions generally entail restrictions upon international trade and finance that one country imposes on another for political reasons. Traditionally, sanctions have taken the form of arms embargoes, imposition of trade and financial restrictions, interruption of relations by air and sea and diplomatic isolation.
Sanctions are basically measures applied in response to perceived wrong doing by a state, such as an act of aggression against another state or human rights violation from the perspectives of international conventions.
Sanctions are used as a policy of segregation for political and economic isolation by the imposing entities.
In recent years, the coverage of sanctions has widened to include other elements that are not directly linked to trade and commerce such as culture and sports. Sanctions may also involve bans on economic, sporting and cultural contacts between countries, as well as “person-to-person” sanctions such as withholding visas or other diplomatic documents from citizens of another state.
The Zimbabwe Democracy Economic Recovery Act of 2001 Section 4(c) Subsection 1 allows US executive directors to each international financial institution to oppose the vote against any extension by the respective institution of any loan, credit, or guarantee to the government of Zimbabwe; or any cancellation or reduction of indebtedness owed by the government of Zimbabwe to the United States or any international financial institution.
Zimbabwe’s balance of payments position has deteriorated significantly since 1997. In 1997, it deteriorated from a deficit of $21 million to $740 million.
This unfavourable development emanated from the combined effects of poor export performance, high import demand, and reduced capital inflows, on the back of adverse publicity. A combination of current account deficits and reduced capital inflows, resulted in excessive pressures on foreign exchange reserves, which, as a result, declined from $830 million (three months import cover in 1996) to $272 million (one month import cover) by end of 1997.
The attendant foreign exchange shortages severely constrained the country’s capacity to meet foreign payment obligations and finance critical imports, such as drugs, grain, fuel and electricity. Reflecting the shortages of foreign exchange, there has been a significant build-up in external payments arrears. At the end of 1999, total foreign payment arrears amounted to $109 million and have since increased astronomically to $2 073, 7 million by end of 2005.
Now as of 2015 Zimbabwe owes domestic and external creditors more than $10 billion and this has made it very difficult for the country to get any assistance from multilateral institutions.
This unfavourable development in the external sector has worsened the country’s creditworthiness as the country’s risk profile was heightened. This subsequently led to the drying up of traditional sources of external finance from the donor community. The withdrawal of the multilateral financial institutions from providing Balance of Payments support to Zimbabwe had a demonstration effect as some other bilateral creditors and donors also followed suit by either scaling down or suspending disbursements on existing loans for both Government and parastatals loans. Prior to these developments, the country had an impeccable record of prompt debt servicing and was highly rated in the international financial markets.
To be continued . . .
Butler Tambo is a Policy Analyst and can be contacted on [email protected] <mailto:[email protected]> or 0776607524
