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Spare a Thought for Foreign Capital

THE inclusive government has since its inception struggled to get financial assistance to fund its operations. Despite efforts to drum up support, funds remain elusive.

Instead, strife has slowly been building up especially in the civil service as the government fails to pay what the workers are demanding. With the increasing signs of discomfort, one is tempted to wonder if crippling strikes are inevitable. Teachers are threatening industrial action while doctors recently called off a stayaway citing “humanitarian’’ reasons.
Despite an improvement in monthly revenue collection to US$90 million in August, a further 300% increase in revenue is required to meet current wage demands. The Finance minister appears to have aptly described the fix they are in when he said “we have no fiscal space” to manoeuvre within. Indeed the options are limited.  
Traditional methods of raising funds have been hamstrung. Taxes, the backbone of revenue, have not been yielding much. This is because individual and company incomes remain depressed owing to the slump in economic activity. Perhaps this was the motivator in adopting the “eat what you gather” approach. A concept aggressively adopted by the local authorities and the police to capitalise on income from fines. Even utilities and academic institutions have become strict on collecting service fees, much to the chagrin of the masses.
Add to that, the other option of domestic borrowing through the issuance of bonds and Treasury Bills is equally not feasible. Apart from a financial system that has become mistrusting over the years, illiquidity remains a major challenge. The savings and investment rate at less than 5% of GDP is dismal.  Recent figures show that as at June the financial system was sitting on deposits of US$705 million, 98% of which are demand deposits. Not only is this a pittance when compared to the Treasury’s thirst estimated to be about US$8,5 billion, the nature of the funds make borrowing impossible.
Printing money for “bailout packages” is out of the question, and we all know why. This leaves the ‘beggar’s bowl’, foreign aid. While we had all hoped that it would by now flow in avalanches, very little has come into the government coffers save for the recent IMF Special Drawing Rights allocation of US$500m.
However, while the government struggles it seems not enough is being done to tap other sources. One such source is capital inflows. This refers to an increase in the amount of money available from foreign sources for the purchase of local capital assets such as shares, money market instruments, buildings, land and machines. It usually flows to countries with strong financial liberalisation, lower taxes and controls, attractive interest rates or asset prices and stable currencies.
Notwithstanding its resources, Zimbabwe currently offers arguably the best returns in the world in terms of interest rates and potential upside in assets. Sadly, and not surprisingly, we have so far failed to attract these funds. This is largely because our investment policy and regulations remain repulsive, inconsistent and hostile to foreign capital inflows.
Even friendly countries within the region like South Africa and Botswana have remained aloof, preferring instead to negotiate more friendly concessions before they can provide the long-promised credit lines. Sticky points in the bilateral investment agreement continue to hold back inflows. Worse still, it appears that the country has been failing to reach an agreement with the South Africans since 1992 when the last investment protection agreement expired.
Indigenisation issues also remain a stumbling block. While empowering locals to own resources is commendable, perhaps a re-look at the process is necessary. The economic recovery efforts require policy to focus more on getting cash injections and not the current scrambling for ownership and expropriation of private investments. One is forgiven for thinking that the process is motivated by self-interest.
For instance, recently, mining authorities emphasised on 50:50 joint venture partnerships with investors interested in mining diamonds. Going by the last Monetary Policy Statement, foreign investors are only allowed to buy up to a 40% stake in any local company. Facts on the ground show that many companies are struggling to recapitalise and that everyone is looking to borrow from someone to get things going. Most shareholders of listed companies are not able to follow their rights if approached.
The question is who among us will take up the other 50% or 60%, given that manufacturing, mining, commercial farming or even power generation and rehabilitation of roads are all capital intensive ventures whose out lays stretch into millions, if not billions, of dollars?  
A more workable solution would be a waiver of all these restrictions for some specified years, say, up to 20 years depending on the projects payback. Providing investors some time to recover their cost, earn some profit before regularising ownership. An address to land ownership laws is also urgently needed.
While it is important to protect the country from adverse shocks, we have too many harsh restrictions and controls on foreign investors. Until they opened up to international trade China, Japan and at some point Hungary were all reduced to just observers of global growth. Today many African countries remain poor despite sitting on some of the richest endowments in the world.
Given that the stock of money available to the private sector in an economy is directly related to economic activity and subsequently national income, incentives should be offered to attract capital. With blanket rules we will miss the goal.


By Ronald K Nyawera 

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