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Consistency essential for growth

With the economic contraction being witnessed locally worsening, most analysts attribute the major cause of the problem to illiquidity.

Victor Makanda

The recent December reporting season confirms this position, with most executives also blaming lack of liquidity for their dismal financial performance.

This trend has escalated to the extent that some players are simply using this term as a cover-up for their internal failures or weaknesses.

While acknowledging the effects of illiquidity on the economy, a closer analysis shows that illiquidity may simply be a symptom of other bigger underlying issues.

Zimbabwe’s woes are to a greater extent caused by its empowerment policy which has been viewed as hostile to investment by many, particularly foreigners.

In delivering the independence message a fortnight ago, President Robert Mugabe revealed that the indigenisation policy was not cast in stone, suggesting that the minimum 51% local ownership requirement was negotiable.

These revelations were viewed as a complete summersault from past comments that insisted on the mandatory 51% equity from all foreign firms operating in the country.

Last week again, the government emphasised the same issue of relaxing the empowerment policy at the Zimbabwe International Trade Fair held in Bulawayo.

In addition, the government stressed that no expropriation or nationalisation of shares held by non-indigenous persons in companies would be done.

Rather, any equity that an indigenous person takes up will be paid for at fair value. These statements have somehow raised a lot of questions. Chief among them is whether this position is believable in light of previous statements which assumed a harder stance.

Assuming they are believable, are they enough to attract the foreign capital necessary to revive the economy?

Before assessing whether they are believable, utterances by the government indicate that officials are coming to terms with the reality that a deep-rooted crisis is haunting the economy.

This crisis relates to the acute shortage of capital, including both long-term and short-term. Government revenues continue to shrink in line with the weakness in aggregate demand.

In addition, company closures, retrenchments, declining capacity utilisation, negative inflation all illustrate the depth of the crisis.

Against this background, one could be forgiven for viewing them as believable. This is because policies can always be modified to suit the needs prevailing at any one point in time.

However, precedence, especially from the land reform programme implemented more than a decade ago, creates suspicion. This is because the government is viewed as unable to keep to its promises and has been the major reason for capital flight and timid capital inflows, especially in the past four to five years.

Whether the summersault is believable or not, a lot needs to be done by the government so that the economy is pulled out of this crisis. These announcements may be a step in the right direction, but their success hinges on what will actually be done from now on and going forward.

Consequently, there is need for the government to put these words in black and white. It would appear the 51% threshold will remain binding in the resource sector.

Government should be explicit on how it intends to implement the empowerment policy in sectors other than mining. The expected equity thresholds together with other social credits that might be considered as compliant may possibly need to be spelt out.

Simply stating that it is open to negotiations will most likely not change the attitude of investors. This is because an individual case by case approach opens up the process to corruption.

Additionally, such an approach does not give clarity and guarantee consistency to potential investors. This explains why most foreign investors took a backseat due to constant changes and discord within the government in relation to indigenisation.

After policy formulation, there is also the need for government to be consistent in implementing these policies. This has been another major impediment which has led to adverse effects on the economy leading to low capital formation across all sectors.

Further to the redrafting of the indigenisation policy, there is also need for policymakers to formulate other policies which support it. For instance, in pursuing bilateral trade agreements, there may be need to see to it that Zimbabwe honours its obligations.

These obligations may be in the form of reviewing certain laws and repayment of capital and interest, assuming there are funds available.

Failure to honour such may be detrimental and explains why most bilateral agreements signed have suffered stillbirth despite showing possible economic benefits. Thus trust and confidence must be generated in pursuing such moves.

In addition, re-engaging multilateral lenders such as the World Bank and the International Monetary Fund (IMF) has a host of benefits.

In Zimbabwe’s case, continuous improvement may be necessary in mending the relations with such institutions as they may assist in promoting the much-needed funding.

Also, potential investors prefer to invest in countries where such institutions have proper relations with the respective countries.

Consequently, focus by the government on honouring and expeditiously implementing the IMF Staff Monitored Programme (SMP), particularly fiscal-related matters, will yield positive results. Adherence to such programmes, reduction of sovereign debt, reducing national corruption and raising capital formation will go a long way to setting the tone for economic revival.

Overall, while the government, after making a self-introspection, has made such a bold move, there is a lot that must be done to revive the economy. Investor-friendly policies need to be implemented if Zimbabwe is to benefit from the diversity within the economy and its rich mineral reserves.

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