Brexit effects filtering through while Zimexit II is on the rise

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TWO phenomena have recently arrested my attention: How Brexit is quietly impacting on the Zimbabwean economy in surprising ways and how children of the Zimbabwean diaspora who had returned home following the dollarisation of our economy are re-emigrating. I call the latter phenomenon is Zimexit II.

The Brett Chulu Column

Brexit effects

Two Zimbabwean financial analysts based in South Africa wrote an opinion piece in the Zimbabwe Independent a week after British citizens voted to exit the European Union (EU). The analysts argued that Brexit was uncharted territory.

They admitted that it was almost impossible to divine on the impact on the global economy of the leave-EU democratic choice. Data on the ground is pointing to a direct connection between Brexit and the Zimbabwean economy by way of systemic relations between Zimbabwe’s non-governmental sector and the European Union (EU). In an economy thirsty for funding, grants from the EU channelled to the non-governmental sector are important in supporting economic activities that boost local supply chains, help the vulnerable sections of our society and provide employment.

The immediate impact of Brexithas come by way of the depreciation of the British pound (GBP) against the dollar.

Most local projects funded by the Department for International Development Fund (DFID), the agency of the United Kingdom government that manages development aid, are budgeted in the GBP currency. Operationally, local NGOs use the US dollar.

The GBP has been one of the most stable currencies in the world.It made economic sense from an operational risk viewpoint for local NGOs on long-term DFID-funded projects to maintain GBP budgets. The GBP has consistently maintained its strength against the US dollar. Brexit upset this almost taken-for-granted stability. Suddenly, the Brexit-instigated fall of the GBP caused funding constraints of already underway projects, due to exchange losses—converting the GBP to dollars was now bringing in less dollars. In the face of such a huge financial risk, every managerial decision to terminate projects midway is prudent.

Prior to Zimbabwe introducing a multi-currency dispensation, local NGOs were already handling multi-currency funding portfolios. However, the operating currency was the Zimbabwe dollar. Local NGOs did not have Brexit on their risk management radars. Brexit was a bolt from the blue.

On June 27, in the aftermath of the Brexit announcement the GBP plummeted to US$1,3 from a pre-Brexit level of US$1,5 — the lowest tumble since the 1985 US$1,05. A year ago, the GBP was trading above US$1,55 for the greater part of the year. Between 2012 and 2014, the GBP gyrated between US$1,6 and US$1,7. A local NGO that got DFID funding between 2012 and 2014 for a 4-year or 5-year project would today experience an exchange loss of between 21% and 28%. This is a massive decline that has a debilitating impact on an NGO’s operations.

To get a handle on the enormity of the funding constraint arising from the fall of the GBP, one needs to appreciate that the norm in developmental budgets is a ceiling on staff costs (salaries and other emoluments) of 25% or less.

Premature termination of projects means that the local NGO can remain with a contractual obligation and financial liability with respect to employment contracts.

The strain on employees and their families is undoubted. On aggregate, premature closure of projects means that local supply chains are deprived of business, especially those that depend heavily on the support of NGOs. The funding situation is worsened by the general austere environment in the EU in which foreign aid is being reduced or completely cut, diminishing the pool of funds available for development aid.

The Zimbabwean situation is worsened by re-prioritisation of international developmental aid to other regions such as Syria. Predictably, our local NGOs are sharing from a dwindling funding pot and battling for limited funding on the open bid market. The NGO sector has been an important component of the Zimbabwean economy due to its ability to mobilise much-needed foreign inflows.

The second channel through which Brexit is affecting the local non-governmental sector is diminished funding from the EU. About 13% of the EU budget came from the UK. With Brexit, there is a huge funding gap of about 13% created.

This is a perfect example of the clause in standard international development aid contacts called force majeur. EU development grant-issuing agencies can easily invoke this clause to either terminate or shorten existing commitments. This is piling pressure on local projects that were already running prior to Brexit.

This has a direct effect on our balance of payments in that shortened projects mean that grants pre-Brexit may no longer be coming our way. The quantum of money runs into millions of dollars. The potential funding hole has a negative impact on local micro-economies that were oiled by the spending of developmental aid in those micro-economies.

Zimexit II

A pattern is emerging in which Zimbabweans who had migrated to overseas destinations and then back to Zimbabwe after 2009 are trekking back to the diaspora. A comparative analysis of the cases I have studied shares a few sub-patterns. A demographic analysis yields no discernible pattern.

The Zim-exiters cover a wide demographic span — young families, singles, young and old alike.

The Zim-exiters were lured back home by the relative post-2009 political and economic stability. They came back with sizeable capital to start entrepreneurial pursuits such as small-scale mining, cattle-rearing, apparently drawn by the “stories of success” of Zimbabweans in small-scale mining and farming.

Employment was the last thing they had on their mind. Buoyed by being on the bleeding edge of advancement in terms of exposure to international systems and practices, they had been emboldened to fuse these knowledge assets into their prospective new Zimbabwean ventures. As in all entrepreneurial ventures, risk is the name of the game. Years of absence from Zimbabwe meant that knowledge of the local nuances was rather thin.

These ventures stuttered and eventually collapsed. Interestingly, they moved the capital they still had to second and even third ventures. This resilience was stretched to its breaking point. Depressed local demand and the cash crisis became the proverbial straw that broke the camel’s back. They decided to leave.

A simple cost-benefit analysis of staying or leaving seemed to have been in favour of Zim-exit II. A return overseas gave them redemption to easily recover economically and re-establish the standard of living they have been accustomed to.

The overseas second-coming is on. No one can accuse these people of being pseudo-patriots — they heeded the call to return home. They came. They saw. They were conquered. And they left again.

Chulu is a management consultant and classic grounded theory researcher. He has published research in an international peer-reviewed academic journal.

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