Victor Bhoroma :analyst
AS the Zimbabwe Stock Exchange (ZSE) puts final touches on the infrastructure needed for operations of the Victoria Falls Securities Exchange (VFEX), investors await to see if their major concerns on investing in the country will be addressed.
The new securities exchange is part of a broader plan to turn the world famous resort town into an offshore International Finance Centre (IFC). The VFEX is liberalised to trade in foreign currencies only so as to allow the blending of tourism activities, global investment enquiries and other business activities in the resort town.
Zimbabwe experienced a sharp decline in foreign direct investment (FDI) inflows from the all-time high of US$745 million recorded in 2018 to US$259 million realised in 2019, highlighting new challenges in attracting long-term investment despite the abundance of business opportunities in the economy. In the first half of 2020, the country received a paltry US$71 million. FDI inflows for the year 2020 are expected to end the year at US$150,4 million, the lowest figure in a decade.
The success of the VFEX will be expected to boost investor interest on Zimbabwe, therefore, the platform is a litmus test to skeptical investors. In 2019, foreign investors bought shares worth US$25 million. In the first half of 2020, foreign buys averaged US$1 million per month. International finance has transformed Mauritius into a global investment hotspot.
Unlike Zimbabwe, Mauritius is best known for its hospitable business climate, good governance, rule of law and free market policies, which have ushered in economic stability.
Zimbabwe managed to register some significant improvements in the ease of doing business in the past two years. Key to the improvements was the amendment to the 2008 Indigenisation and Empowerment Act that restricted foreign ownership of local businesses to 49%. The 2018 legislation allows foreign investors to own any percentage of local assets except for the diamond and platinum mining sector which require partnership with local investors or government approvals. In terms of overall ranking, the country improved on the World Bank Ease of Doing Business rankings from position 155 in the world to 140 out of 190 countries.
A high ease of doing business ranking means that the regulatory environment in that country is more conducive to the starting and operation of a business. Globally, New Zealand, Singapore, Hong Kong, Denmark and South Korea are ranked as the best countries in terms of business climate. In sub-Saharan Africa, Mauritius, Rwanda, Kenya, South Africa and Botswana rank as the best economies on ease of doing business. Zimbabwe has massive potential on improving the local business climate and providing a solid foundation for VFEX through policy reforms on the following thorny aspects.
Addressing investor concerns
The major reason why investor interest on the ZSE and local businesses has waned in the past three years is because of restrictions on repatriating dividends and capital for foreign investors. The same applies to guaranteed exit when divesting from Zimbabwe. The country’s foreign exchange regulations and inconsistent monetary policies have been a pain to most investors who sought formal channels to repatriate dividends. In the end, potential investors hold onto their capital or invest elsewhere in the region while existing ones look for illegal or unofficial channels to repatriate their dividends. The purchase of Old Mutual shares on the ZSE and their disposal on the Johannesburg and London Stock Exchange became one such avenue.
To improve the business climate and attract investment, the government needs to reform the current exchange controls and regulatory bottlenecks to ensure that investors use formal banking channels to repatriate their dividends and move capital out (subject to normal due diligence). The government needs to craft 10 years (or even more) investment policies that do not transform with change of personnel in government. These policies must align with other southern African countries, which compete for the same investment inflows and are endowed with similar natural resources.
To provide a predictable business climate and attract meaningful investment, there has to be guarantees to investor property rights, respect for rule of law and judicial independence in settling legal disputes. The government has to adopt clear and consistent policies on dealing with land and mining assets, which have seen policy summersaults in the past few years. Currently, there is a lot of rent seeking behaviour and bureaucratic red tape in the application of mining licenses and approval of exclusive prospecting orders (EPOs). This is frustrating genuine local or foreign investors.
Trading across borders
Businesses operating in Zimbabwe have to renew import and export licences after every few months. To do this they have to go through more than 10 agencies so as to trade. The approvals for such import or export permits follows applications to various government departments (with separate payments for different levies) which can ordinarily be housed under one roof. In Singapore, the average time for export border compliance is just 10 hours, while in Zimbabwe is takes a minimum of four days.
To improve the investment climate, Zimbabwe has to streamline a number of import and export applications to be processed under one government agency and offer long-term licences to establish businesses that import or export the same commodities for their business operations. Ordinarily approvals for export licences have to be quicker and easier while raw material imports should carry lighter import tariffs when compared to importation of finished goods made from the same raw materials.
The stability of the local financial sector is key in providing credit to potential investors. For this to happen, interest rates have to be aligned to inflation movements to ensure that the banking sector can be able to get external funding while lending at competitive rates to the business sector without running into exchange rate losses.
Currently local banks are pursuing capital preservation and are reluctant to offer credit to investors or businesses due to the mismatch between the prevailing interest rates (Pegged at 35%) and inflation rate (Year–on-Year inflation recorded at 761% for August 2020). Also key is the effectiveness of local collateral and bankruptcy laws in facilitating lending and protecting the rights of both borrowers and lenders.
The current taxation regime in Zimbabwe is burdensome with many tax heads, levies, permits, licences and statutory fees seriously eroding competitiveness for formal economic players.
Taxes on electronic transactions, mobile tariffs, excise duty on petroleum products and mining royalties need to be aligned with our regional peers who incur similar costs in production or importation from the same suppliers.
A 2018 study by the International Monetary Fund (IMF) discovered that 60% of the Zimbabwean economy is informal, second in the world only to Bolivia’s 62,3%. This means that there is a shadow economy hidden from government for tax avoidance purposes and this can only be dealt with through simplification of tax procedures for tax compliant businesses or individuals and payment of tax returns to applicants without subjecting the taxpayer to audits. Currently businesses evade taxes and do not file for tax returns as filing triggers an investigation into their wider business operations.
The local business climate has been punitive to investors who use formal channels to trade in the economy and this has accelerated the rate of informalisation, corruption and crowded out genuine investment.
The recent command style directives to mobile money operators, dual listed foreign businesses and the ZSE painted a very bad picture on Zimbabwe’s business climate. The selective application of the law and outright disregard for guarantees to property rights in mining and agriculture have to improve tremendously to attract investment.
Investors envisage an investment environment where their property is protected by the law (independent judiciary) and not by political interests as those can shift overnight.
Deliberate policies to reform the local business climate will vastly improve economic productivity as evidenced by the recent declaration of Mauritius as the only high income country in Africa by the World Bank despite its natural resource limitations.
Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email firstname.lastname@example.org or Twitter @VictorBhoroma1.