25.04.2019 | Old problems resurface in Zimbabwe

Hopes of an influx in investment in post-Mugabe era flounder, amid worsening finances and political violence.

Click here to read the Alaco article in International Investment

 

A deepening foreign currency crisis, stuttering reforms and growing concerns over the rule of law are curbing foreign investors' willingness to engage with Zimbabwe.

By Yigal Chazan

The economic optimism that followed Emmerson Mnangagwa's replacement of international pariah Robert Mugabe nearly eighteen months ago is fast disappearing as the government struggles to get to grips with the country's financial ills, largely inherited from massive borrowing and irresponsible spending over the course of Mugabe's decades-long rule.

Mnangagwa declared before last July's general election that he had received some $11bn in foreign direct investment (FDI) commitments since he came to power, yet most investors continue to adopt  a wait-and-see approach, pinning their hopes on the efforts of Finance Minister Mthuli Ncube, a former chief economist at the African Development Bank, to stabilise the economy. The country received just $470m in FDI in 2018, making it one of the least attractive destinations in southern Africa, according the Zimbabwe Independent, a business weekly.

Mnangagwa declared before July's general election that he had received some $11bn in FDI commitments since he came to power, yet most investors continue to adopt a wait-and-see approach." Yet even without the twin calamities of drought and floods triggered by Cyclone Idai that have devastated agriculture, the task of extricating the country from the morass of debt - $17.8bn at the end of last year -  and double-digit inflation is highly challenging. Zimbabwe is in need of a bailout but not even close ally China appears ready to come to the rescue, even as it increases its lending elsewhere in Africa.

Zimbabwe must pay over $2bn of arrears to several of the international lenders - the World Bank, the African Development Bank and the European Investment Bank - before it can borrow again. In April Ncube agreed an economic plan of action with the IMF, focused on fiscal deficit reduction and the foreign exchange crisis, which may help to speed up re-engagement with financial institutions. But his efforts to date do not instil much confidence. The IMF's short term outlook is gloomy, forecasting an economic contraction of 5.2% this year. If the prediction proves to be accurate, it will be the first actual recession since 2008, when hyperinflation was the second-highest on record. 

Dollars or Zollars?
Ncube's attempts so far to address longstanding liquidity problems, which have forced many companies to close, appear to be unravelling. Zimbabwe eventually abandoned its own currency for the US dollar and other currencies in 2009. When greenbacks then became scarce, surrogate, unrealistically dollar-pegged bond notes and electronic dollars, nicknamed "zollars", were adopted. These have proved to be ineffective and in February this year were replaced by a transitional, free-floating currency called the Real Time Gross Settlement dollar - named after the system banks use to transfer money to each other. The RTGS currency has already depreciated against the dollar.

The government clearly has to raise revenues and cut spending, but in October an increase in taxes on electronic financial transactions, which have mushroomed because of the currency chaos, led to shortages of basic commodities, fuel and price rises as businesses demanded cash - with the new RTGS dollars only compounding inflation. The cost of bread, a staple, recently doubled. Year-on-year inflation stood at nearly 70% in March, though the true figure is believed to be much higher.

Efforts to stem the shortages of fuel backfired badly in January when the government hiked the cost of petrol and diesel by 150 per cent in order to dampen demand. The move led to nationwide protests put down in a security crackdown that resulted in at least a dozen dead, dozens more injured and up to 700 arrests, according to human rights groups.

Long term, Zimbabwe will need huge loans to ease its foreign currency shortage, which lies at the root of the country's problems. The government spends much of the foreign currency it has on imports of food, medicines, electricity and fuel leaving manufacturers struggling to buy in vital parts and goods for exports. Last year the trade deficit, measured between February and October, was up 34% over the same period the previous year.

Exports are dominated by metals which Zimbabwe has in abundance and Ncube to his credit has all but scrapped a law preventing foreigners from owning majority stakes in Zimbabwean companies, a policy which has long deterred overseas investment, especially in the critically-important mining sector. One of Mnangagwa's first major reforms, the repeal of the Indigenisation and Economic Empowerment Act was only partial, as it continued to apply to the extraction of platinum and diamonds. His eagerness to develop these industries has prompted plans to lift the ownership restriction on the former and possibly the latter.

The government, which wants to boost mining export revenue from $3bn to $12bn by 2023, is also looking to streamline mining taxes to make the sector more competitive. But it expects mining companies to make good their commitments, warning those slow to proceed with projects that it may introduce a "use it or lose it" approach to concessions.

After the crackdown
While investor caution is fuelled primarily by liquidity concerns, misgivings about the rule of law and the potential for instability also have a significant bearing on investment decisions. Mnangagwa has worryingly resorted on several occasions to the kind of state violence employed regularly by his predecessor. Security crackdowns following last July's election when the opposition disputed the presidential ballot results and, more recently, the January fuel price protests have sparked international condemnation.

The incidents have raised questions about Mnangagwa's willingness to break with the past. His vice president, the former army general Constantino Chiwenga, who engineered the coup that brought Mnangagwa to power, is suspected of ordering the military excesses. On both occasions Mnangagwa has pledged to punish those responsible for the crackdowns to little avail.  Some have speculated that the two men are in engaged in a power struggle, others see more of a ‘good cop, bad cop' dynamic at play.

Whatever the case, the government's use of violence to suppress unrest at a time when the country is likely to see further discontent, as spending cuts and other painful reforms are introduced, may make investors even more reluctant to engage than is already the case.

Yigal Chazan is the Head of Content at Alaco.

(This article orginally appeared in International Investment)