It has the potential to become one of the more prosperous economies in Africa, given its educated workforce, mineral riches and some of the most fertile farmland on the continent. Yet investors continue to keep Zimbabwe at arms' length. Alaco's Yigal Chazan explains why.
Zimbabwe's former president, Robert Mugabe, fell from power more than two years ago. His successor, Emmerson Mnangagwa, has blamed investors' reluctance to engage on EU and American sanctions yet this assertion has little or no foundation and serves only to distract attention from the government's own woeful management of the economy.
The impact of sanctions
International sanctions are mostly levelled at individuals, including Mnangagwa, and a few companies associated with the ruling ZANU-PF party. They take the form of financial and travel restrictions along with an embargo on the sale to Zimbabwe of military hardware and equipment that might be used by the state against its political opponents.
In February, the government's poor stewardship of the economy was underscored by the IMF, which concluded that foreign exchange and monetary reforms had failed to restore confidence in Zimbabwe's new currency. The IMF also dampened hopes that Zimbabwe might soon be able to tap international donors, pointing to continuing delays over the resolution of debt arrears issues."
The US and the EU, the principal sanctioning authorities, have stressed that their intention is not to harm the economy, rather to penalise those alleged to be engaged in political and human rights abuses.
Indeed, both the US and EU provide Zimbabwe with sizeable amounts of development and humanitarian assistance and have signalled their willingness to lift sanctions once they see evidence of serious political and economic reform.
On taking office in late 2017, Mnangagwa declared that Zimbabwe was open for business and promised wide-ranging reform. The upbeat rhetoric buoyed foreign investors who channelled $745m worth of FDI into the country in 2018, more than double the previous year, according to UNCTAD. But, in 2019, the Reserve Bank of Zimbabwe reported that FDI had slumped to $259m, a fraction of the $27bn in investment commitments which the government said it had received the previous year.
What accounts for the downturn? It cannot be attributed to sanctions because 2018 saw significant improvement in investment despite public statements by sanctioning authorities which, while expressing cautious optimism about the political transition, were clear that they would only consider lifting restrictions once robust reforms had been introduced. Their reservations, as it transpired, proved to be well-founded.
After a relatively short honeymoon, Mnangagwa began to live up to his former reputation as a Mugabe-era enforcer. The warning signs came in his disputed general election victory of October 2018, which was followed by a wave of political repression.
This will have dealt a blow to investors who had hoped the ballot would usher in a new era of stability. Worse was to come in 2019. A 150% hike in the price of fuel in January that year, part of a series of austerity measures, led to mass protests and a subsequent security crackdown.
Further economic missteps heightened investor nervousness. In an effort to reintroduce the Zimbabwean dollar, destroyed by hyperinflation a decade before, a new transitional currency, the so-called RTGS (Real Time Gross Settlement) dollar, was launched in February last year alongside the existing basket of foreign currencies, including the US dollar, used since the battered local currency was withdrawn in 2009.
But the RTGS dollar quickly lost value against its American equivalent and inflation surged to 100 per cent in May of 2019. Then, in June, in a controversial move, the transitional currency was made the sole legal tender - and renamed the Zimbabwean dollar - with the aim of giving the authorities greater control over monetary policy.
The former dollarised economy, officials argued, had made Zimbabwe's exports less competitive. But the country had limited hard currency reserves to support the new Zimbabwean dollar.
Shortages of US dollars worsened and inflation continued to rise - exceeding 500% in December, some estimates suggested. While a degree of inflationary pressure came from grain shortages resulting from the severe drought and cyclones that pummelled agricultural production, the main cause appears to have been the government's determination to enforce an unrealistic exchange rate.
The economy, now in the worst condition for a decade, is reported to have contracted by 6.5% last year, the worst performance in sub-Saharan Africa. The highly indebted state's loan arrears to the World Bank and the African Development Bank are close to $2bn, while total external indebtedness stands closer to $8 billion. It urgently needs an infusion of funds, particularly as public spending, squeezed last year, is expected to rise in order to address growing poverty. The World Bank downgraded its classification of Zimbabwe to a low-income country in October.
In February, the government's poor stewardship of the economy was underscored by the IMF, which concluded that foreign exchange and monetary reforms had failed to restore confidence in Zimbabwe's new currency. The IMF also dampened hopes that Zimbabwe might soon be able to tap international donors, pointing to continuing delays over the resolution of debt arrears issues.
Disappointed with Mnangagwa's handling of the economy, investors will have drawn little comfort from his pledge to tackle the corruption that had become endemic under Mugabe. The president appointed an anti-corruption commission (ZACC) in July last year to investigate financial crime, which the campaigning group Transparency International estimates has been costing Zimbabwe $1bn a year.
So far, there have been some high-profile arrests. In December, the wife of Vice- President Constantino Chiwenga was detained on charges of money laundering, fraud and violating exchange control regulations. In November, Joram Gumbo, a former transport minister, was arrested for alleged criminal abuse of office. And in July, tourism minister Prisca Mupfumira was charged with corruption in connection with the state pension fund when she was labour minister.
In late February, ZACC revealed that it had identified, informally, over $7bn worth of property and cash around the world which had been siphoned off by former and current leaders of the ruling party. The commission has pledged to repatriate the funds: a 2019-2024 Strategic Plan allocated 60% of its resources to investigations and asset recovery.
At this stage it is hard to judge the seriousness of these anti-corruption efforts. While some Mugabe-era ministers have been arrested on graft charges, Reuters reported in November that they are now free on bail while their cases are stuck in the courts. Since assuming power, Mnangagwa has largely paid lip service to the fight against corruption, according to the Zimbabwe Independent, with the few cases which have been prosecuted mostly seen as part of Zanu-PF's internal power struggles.
ZACC is making the right noises about the repatriation of stolen assets, but it is questionable whether it has sufficient resources and the political clout to get the job done. To government critics it sounds like an attempt to distract attention away from the economy and win friends amongst international donors. That is because, for all the professed attempts to deal with corruption, allegations of financial abuse continue to dog the government.
According to Siphosami Malunga, the executive director of the Open Society Initiative for Southern Africa, after Mugabe was deposed, it emerged that the government had borrowed $5bn without parliamentary approval and for which it could not account. It was suspected, Malunga wrote in the Africa Report, that the money was parcelled out to senior government and Zanu-PF officials and military officers, some to be used for the Zanu-PF election campaign in 2018.
In 2019 the ministry of finance acknowledged to parliament that it could not account for $3bn from the agricultural subsidy scheme, Command Agriculture, which Mnangagwa had championed as a means of bolstering food security.
Opposition politicians have alleged that there is little oversight of funding for the initiative, which they have described as a front for corruption. The extent of maladministration by the authorities was laid bare in July last year in the auditor-general's public audit report for 2018 which, according to the Zimbabwe Independent, revealed "serious public sector mismanagement bleeding the economy of millions of dollars."
Though governance concerns have loomed large, some significant steps have been taken to attract investment, notably the repeal last year of the Indigenisation and Economic Empowerment Act, which had prevented foreign investors from gaining majority stakes in local enterprises. The move could encourage financial flows into some of the most potentially profitable parts of the economy such as the mining sector, but high electricity tariffs and power outages might blunt investor enthusiasm for the latter.
Devastated by Mugabe's land redistribution reforms, the farming sector is also undergoing reform with a view to attracting investment. White farmers who lost holdings under Mugabe are to be compensated - albeit not as generously as they would wish - and are being granted 99-year leases previously restricted to black farmers.
The latter have also been allowed to sublet or lease their farms, facilitating joint venture opportunities with white farmers. But the main obstacle to progress is that without being able to offer title deeds as collateral, farmers struggle to raise finance from the banks.
The net effect of this is to prevent the recovery of the farming sector, an area of economic activity in which Zimbabwe used to enjoy a significant regional competitive advantage. And the issue at stake here is political, rooted in vindictive policymaking by Zanu-PF and nothing whatsoever to do with international sanctions, which post-dated the land reform programme.
For both mining and agriculture, the currency crisis and acute shortages of US dollars is also likely to curb investment. And concerns over fiscal and monetary policy are also believed to have contributed to missed deadlines in 2019 for a number of part-privatisations of state enterprises.
Fortunately for Zimbabwe, China, a long-time investor, extending $2.1bn in loans in 2018 alone, remains engaged. It is committed to several big infrastructure developments, including power-generation and transport projects, and is also investing in agriculture. But with the economy deteriorating there is a real risk of default.
That would leave Zimbabwe vulnerable to China's so-called ‘debt-trap diplomacy', whereby debtor nations come under pressure to cede controlling stakes in infrastructure projects in order to clear their arrears. However, for now, with western investors once more reluctant to do business with Zimbabwe, it has few other options.
Rising incomes in Asia will probably be the most important investment story of the 2020s. Asia is home to 60% of the world's population, with both China and India each accounting for about 18% of the global total.