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Improving the business operating environment

Zimbabwe jumped two places to 159th position on the World Bank’s Ease of Doing Business ranking. While this points to some strategic successes, the country remains less attractive to investors than higher ranked African peers, such as Rwanda, Tanzania, Kenya, Ghana and South Africa.

Financial matters with Tinashe Kaduwo

Key challenges holding the country back are its infrastructure deficit, high cost of capital and limited access to credit markets. A more favourable business environment is likely to stimulate the start-up of new businesses and the expansion of existing ones across various sectors of the economy. This, in turn, would boost the output of these sectors and the economy’s total output. Growth in the economy, driven by a better business operating environment, is likely to further entice new businesses as the confidence of investors and business owners are usually strengthened by a thriving economy.

According to the World Bank, Zimbabwe made starting a business easier by eliminating the requirement to advertise applications for a business licence. The country has also launched an official website for investor information. While these measures are welcome, other inherent deterrents to successful business operations still exist. The first challenge is the infrastructure deficit, specifically in transport and power supply. The country currently spends less than 0,2% of its GDP on infrastructure. Road transportation, the most common form of transportation in the country, is particularly bad and has a significant negative effect on the cost of distribution. Countries such as Singapore, Denmark, and the UK, which have 100% of their roads tarred, are ranked 2nd, 3rd and 7th respectively with the world’s best operating environment. It is also noteworthy that of the tarred roads in Zimbabwe, a large proportion is in very poor condition.

The infrastructure deficit in the power sector is equally challenging. Given the country’s total population of around 16 million, the energy need is estimated at 1 400 MW daily. However, Zimbabwe only generates an average of 980MW daily, creating a deficit of 420MW, relying on imports, particularly from neighbouring South Africa and Mozambique. The low power supply, coupled with a growing population, makes electricity costly. This translates to a higher operating cost for businesses as electricity is an integral part of total operating expenses. Zimbabwe is ranked 161 among 190 economies in the ease of accessing electricity.

In addition to infrastructure deficiencies, credit inaccessibility have been major deterrents to business growth in Zimbabwe.

Access to credit and a low interest rate environment supports private individuals in raising capital as repayment is more manageable. In contrast, high interest rates signify higher finance costs and lower profit margins for new businesses. Among the world’s top 20 countries with the lowest interest rates, 16 made the list of the world’s 40 economies with the best business operating environment. These countries include: France, Japan, Netherlands, Norway and Finland, among others. While a low interest rate alone might not explain why these economies have productive operating environments, theoretical evidence highlights a strong correlation between a low interest rate environment, credit accessibility and business growth.

In sub-Saharan Africa, significant lessons can be drawn from Rwanda, the economy with the most favourable operating environment in the region. Rwanda has rapidly improved on the World Bank ranking. The country, which ranked 150th in 2008, has risen to 41st position in 2017. Between these periods, the economy has expanded by about 72,4%. This achievement is connected to the Rwandan government’s constant dialogue with the private sector to determine its perspectives and needs. This has given the government a clear understanding of the specific needs and challenges entrepreneurs face. Zimbabwe has a long way to go to build the competitiveness of its business operating environment. If the deficiencies are not addressed, they will continue to impede investments and growth in key sectors of the economy, threatening the government’s economic revival efforts.

Kaduwo is an economist at Econometer Global Capital. — tkaduwo@econometerglobalcapital.com or kaduwot@gmail.com.

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