THIS is my inaugural article for the Zimbabwe Independent.
The Ritesh Anand
I would like to pay tribute to the late Eric Bloch who held fort in this column for many years and wrote a staggering 953 articles over 14 years.
I hope that my articles will equally stimulate debate and inject new ideas. The aim of the op-eds is to provide an economic analysis on important subject matters.
This week I will look closely at the importance of foreign direct investment (FDI) in stimulating growth and investment in Zimbabwe. I will also examine closely factors affecting FDI inflows to Zimbabwe and offer some advice to policymakers.
Zimbabwe’s nascent economic recovery appears to have stalled with economic growth decelerating in 2013 and this year. Finance minister Patrick Chinamasa recently revised down Gross Domestic Product (GDP) growth figures for 2014 from 6,1% to 3,1%.
Chinamasa said annual foreign capital flows, those to Africa and the Middle East, remain low at only 9,1% of the global US$1,1 trillion.
This is inclusive of equity investment, foreign credit and official inflows.
Capital flows to emerging Asian economies are estimated at US$521 billion for 2014. Inflows of capital are projected to remain sensitive to specific country risks, particularly regarding political stability, sustainability of the balance of payments and credibility of domestic macro-economic policy frameworks.
According to the International Monetary Fund (IMF), which had a team in Harare until this week, Zimbabwe’s external position appears vulnerable, with a wide current account deficit, an overvalued exchange rate and low international reserves.
We expect growth to remain sluggish in 2014 and over the medium-term, with risks clearly to the downside in the short-term. Key risks to the outlook include lower-than-projected tax revenues, policy slippages, financial sector stress and the decline in global commodity prices. Zimbabwe faces these risks with “very thin buffers”.
Given this, government needs to act decisively if it is to resuscitate the economy which now appears in a free-fall. Key to this would be attracting much-needed FDI to kick-start economic recovery.
In the absence of any international financial support for Zimbabwe, it is imperative that policymakers take bold decisions to resuscitate the economy and boost both consumer and investor confidence.
While re-engagement with the IMF and other multilateral institutions is a positive step towards this, much more needs to be done to restore investor confidence. There is need for consistent, transparent and accountable policies towards FDI.
Government needs to be more decisive if it is to restore confidence in the market.
We will take a closer look at the key factors that drive FDI flows to Africa and how Zimbabwe ranks relative to other African countries. We will also look at key issues facing Zimbabwe and provide recommendations.
At a recent breakfast meeting, the head of the IMF delegation to Harare, Domenico Fanezzi, said that Zimbabwe did not qualify as a Highly-Indebted Poor Country (HIPC), and rightly so. We are not a poor country with our vast natural resources and well-educated entrepreneurial population.
What Zimbabwe needs is a change in attitude and perception. Why does a country with such vast natural resources attract so little FDI. Last year, Africa received over US$82 billion in FDI, with our neighbours Mozambique receiving over US$8 billion or 10% of FDI flows to Africa.
Zimbabwe, on the other hand, received less than US$400 million in 2013, according to official statistics. In order to understand why Zimbabwe receives such a small share of FDI, it’s imperative to take a closer look at factors which drive FDI flows to Africa:
The following factors were considered to be important when considering FDI flows to Africa:
There is a positive relationship between market size and FDI inflows;
Openness to trade has a positive impact on FDI flows;
Higher financial development has negative effect on FDI inflows;
High government consumption expenditure attracts FDI inflows to Africa;
Higher FDI goes where international remittances also go;
Agglomeration has a strong positive impact on FDI inflows to Africa;
Natural resource endowment and exploitation (especially for oil) attracts huge FDI into Africa, and
East and southern African sub-regions appear positively disposed to obtain higher levels of inward FDI.
How does Zimbabwe rank when it comes to the factors that attract FDI flows to Africa (see table below):
So why doesn’t Zimbabwe attract more FDI flows:
Size of market (it has a small population);
Perceptions (gap between perception and reality);
Lack of transparency, consistency and accountability;
Ease of doing business.
With only 13 million people, Zimbabwe is considered to be a small market. However, if we were to consider Zimbabwe’s strategic location within the region providing access to Zambia, Botswana, Mozambique and Malawi makes it a lot more attractive to overseas investors.
Political uncertainty continues to deter investors and it’s imperative that there is greater unity and focus in government if it is to attract significant investment.
Sanctions also continue to have a negative impact on businesses in Zimbabwe. While the sanctions are targeted, they inhibit investment making it very difficult for private sector companies to engage with foreign investors.
European financial sanctions will apparently be removed in the next month making it easier for European financial institutions to provide much-needed lines of credit to Zimbabwe, while the remaining European measures could be removed in February next year. It is possible US sanctions will also be removed shortly thereafter. The fact of the matter is that sanctions have not worked and have only served to make life more miserable for the average Zimbabwean.
There is a significant divergence between perception and reality. Many investors who visit Zimbabwe are pleasantly surprised at how peaceful the country is, the state of infrastructure, especially our roads and how wonderful and educated our people are.
International perceptions of Zimbabwe will improve once the country has restored its relationship with its former colonial master, Britain.
Policy inconsistency, especially around indigenisation regulations, has had a negative impact on investment. While most countries have similar policies aimed at empowering its people, the lack of consistency, transparency and accountability has hindered investment into the country.
It is imperative that government addresses investor concerns and provide a simpler, more consistent policy framework on indigenisation. No one is really against the principle of empowerment; it is the implementation that matters.
The other issue, Zimbabwe is becoming an increasingly corrupt nation. As economic conditions deteriorate, the need for additional income increases. Corruption is inversely related to economic growth and prosperity. The higher the average disposable income, the lower the temptation to be corrupt.
Once again, corruption exists in most countries, but it is the extent of the corruption and what is being done to combat it that matters.
Zimbabwe ranks poorly in the World Bank Doing Business Indices as well as other indications of investment attractiveness. The World Bank indices are a barometer for international investors seeking to come into a country. It is critical that Zimbabwe makes it easier for investors to do business in Zimbabwe and addresses some of the concerns highlighted in the World Bank Doing Business Report 2013.
Zimbabwe is, however, poised for growth driven by FDI. Changing perceptions and restoring investor confidence is key to attracting investment. The lack of domestic liquidity makes it difficult to stimulate growth from within. Zimbabwe needs to create a favourable environment which includes, but is not limited to, stable macro-economic conditions, stable political environment, maintaining multi-currency regime, attractive policies, respect for property rights and rule of law,
Review policies and framework to attract FDI inflows — there is need for greater policy consistency and re-engagement with the international investors;
The targeted sanctions continue to play a significant role in deterring potential investors, especially European and US investors. Removal of sanctions is thus critical for Zimbabwe to move forward;
Zimbabwe’s “Look East” policy has had limited success in attracting significant long-term investments. A broader policy framework to attract investments from all regions is essential to the long-term development of the country
Establishment of a special economic taskforce which will report directly to the Minister of Finance with policy recommendations to attract FDI;
The Zimbabwe Investment Authority needs to be empowered and become a “gateway” for foreign investors rather than a “gatekeeper”;
Review the ZimAsset economic blueprint and define key success factors and practical implementation of the plan, and
Long-term vision for the country — Zimbabwe in 2050?
Anand is the founder and managing director of Invictus Capital.
The views expressed herein are personal and do not necessarily reflect those of his employer. E-mail: firstname.lastname@example.org