The Sunday News
WITH the current mantra on re-engagement, one ponders on the question of foreign direct investment (FDI) and whether we should as a nation be chasing after the foreign capital and investors or maybe it is high time we come up with other options to kick start the economy.
This series of articles will look at the amount of FDI generated by Zimbabwe since Independence and seek to find alternatives to this journey of courting foreign funders, lest we perish as a country waiting for some outsiders to come to our economic rescue.
Historical FDI performance in Zimbabwe
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 the time of independence in 1980, the new Zimbabwean 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 new 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 (FIC) 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 to 100 percent.
FDI in the 1990s
In 1990, the 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.
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 US$50 million per year between 1990 and 1997. In 1998, FDI inflows reached a record high of US$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 instability and macro-economic imbalances.
Nose dive in investor confidence post 2000
Investor confidence was further rattled in 2000 when the international community did not buy into the land reform exercise. 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 US$67 million compared to US$165 million in the same period the previous 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 US$146,6 million compared to US$311,3 million during the same period in 2013, a marked decline of over 50 percent.
In 2015, Africa received FDI of over US$82 billion with Mozambique getting US$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 of 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 because of some of our policies like the Indigenisation laws, poor rating in the Ease of Doing Business Index and many such other global business indices.
Policy Inconsistency and FDI in Zimbabwe
Since the adoption of the US dollar as the official currency, there have been improvements in trade, business, fiscal, labour and monetary freedoms. There was also a growing consensus that the business environment, for example, the restricted licensing policy should be improved. Yet, in the 2017 Economic Index Freedom, the Heritage Foundation ranks Zimbabwe as one of the least economically free countries, only ranked higher than Eritrea, The Republic of Congo, Cuba, Venezuela and North Korea.
In March 2016, then Indigenisation Minister threatened foreign firms with closure if they did not comply with the Indigenisation Law enacted in 2007. The law, before it was amended by the new Government, limited foreign ownership of companies to 49 percent.
The unpredictability of the Government’s economic policies and the unstable political and economic climate in recent years has undermined foreign investment. BMI currently ranks Zimbabwe 43rd out of 48 states in Sub-Saharan Africa and 191st out of 201 countries worldwide for trade and investment attractiveness.
Even though Zimbabwe is known for coming up with lofty policy blueprints that are meant to create a viable investment climate, the Second Administration should then stick to its own timelines and break with the past of unfulfilled deadlines. The Ministry of Macro-Economic Planning and Investment Promotion commented in October 2017 said that the creation of Special Economic Zones (SEZs) were expected to attract foreign direct investment (FDI) and translate into export-led economic growth in the landlocked country.
The Government adopted the SEZ Act in October 2016 and rolled out consultative meetings and sensitisation workshops for stakeholders in the latter part of 2017. The SEZs will offer investors tax and administrative benefits and incentives. Additionally, foreign investors will not have to comply with the indigenisation laws within the SEZs, which is bound to promote FDI in Zimbabwe. Outside of these meetings nothing tangible has been done around the SEZs and two years down the line no employment has been created or real investment come even though the SEZ initiative is the one that was expected to be the panacea to our investment headaches.
The question then becomes how Zimbabwe can make itself more marketable and attractive to foreign capital. The country has unparalleled abundance of natural resources and very educated work force and relatively intact infrastructure.
And in the next instalment one will look at diaspora remittances among other avenues to foreign currency and whether these can be harnessed for local investment, especially bearing in mind that this group of Zimbabweans brought in a combined US$1 billion per year in most years past.
Butler Tambo is a Policy Analyst who can be contacted on [email protected]