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Are the new investment policies under the new dispensation enough to lure the mystical investor?

Investor optimism following the 2017 fall of former President Robert Mugabe has dissipated as the new dispensation has been slow to follow through on its promises to reform and improve the business environment. The economy has suffered hyperinflation and contracted sharply in 2019 worsened by the climatic shocks that crippled agriculture and electricity generation. Unsustainable monetary policy has led to a protracted currency crisis which continues to strain the economy. The Zimbabwean dollar introduced in February 2019 has already lost approximately 98 percent of its value on the black market. Failure to implement finance ministry efforts to rein in the budget deficit undermined public confidence in the financial sector. The government adopted a stabilization and reform agenda supported by IMF Staff-Monitored Program but by February 2020 the IMF reported the SMP had gone off track due to government failures to fully implement reforms. Zimbabwe remains in arrears to the World Bank and other multilateral and bilateral institutions restraining many forms of multilateral assistance.

By Netsai Muchemwa

Although the government has repeatedly affirmed its commitment to improve transparency, streamline business regulations and address corruption, the last two years have brought limited progress. Zimbabwe has attracted less than USD 600 million a year on average in foreign direct investment over the past decade. Zimbabwe’s incentives to attract foreign direct investment include tax breaks for new investment by foreign and domestic companies and making capital expenditures on new factories, machinery, and improvements fully tax-deductible. The government waives important taxes and surtaxes on capital equipment. The government has made slow progress at improving the business environment by reducing regulatory costs but policy inconsistency, weak institutions and lack of fiscal discipline have continued to frustrate business and investment.

Corruption remains rife and there is little protection of property rights, particularly with respect to agricultural land. In 2016, the government introduced a surrogate currency called the bond note officially pegged at USD only for domestic transactions. Money printing caused the currency to lose value and in February 2019 the Reserve Bank of Zimbabwe de-linked the local currency from the USD and has not yet implemented a market-clearing exchange rate regime. As a result, it remains difficult to access dollars at the official exchange rate and this has given much opportunity to the black market which has a higher rate. The government banned the use of foreign currencies for domestic transactions in 2019 further complicating the business environment but introduced some exceptions for investors and further relaxed the rules in March 2020 amidst the Covid-19 pandemic. Inflation has jumped from 10.6% in 2018 to 676% in March 2020 reflecting monetary expansion, currency depreciation, and removal of subsidies on fuel and electricity. The sectors that attract the most investor interest are tobacco, mining, energy, and tourism. Zimbabwe has a well-earned reputation for the high education levels of its workers. In order to attract investment and encourage competitiveness, the government has encouraged public-private partnerships and emphasized the need to improve the investment climate by lowering the cost of doing business and restoring the rule of law and sanctity of contracts.

Zimbabwe Indigenization and Economic Empowerment Law limits the number of shares owned by foreigners in the diamonds and platinum sectors to 49% with specific indigenous organizations owning the remaining 51%. The government has signaled its intends to remove these restrictions. The Zimbabwe Investment Authority (ZIA) promotes and facilitates both foreign direct investment and local investment. ZIA also facilitates and processes investment applications for approval. While the government has committed to prioritizing investor retention, there are still no mechanisms or formal structures to maintain an ongoing dialogue with the investors. While there is a right for foreign and domestic private entities to establish and own business enterprises and engage in all forms of remunerative activities, foreign ownership of businesses remains 49/51%.

Foreign investment is free to invest in the vast majority of non-resource sectors without any restrictions as the government aims to bring new technologies, generate employment, and value-added manufacturing.  The government reserves certain sectors for Zimbabweans such as car hire, taxis, employment agencies, grain milling, passenger buses, bakeries, advertising, estate agencies, and dairy processing. According to the country, U.S. investors are not especially disadvantaged or singled out by any of the ownership or control mechanisms relative to other foreign investors. That being said, it is quite apparent that the new investment policies under the new dispensation are not enough to lure the mystical investor.

Written by Netsai Muchemwa, a Student at the University of Zimbabwe. For comments contact nmuch14@gmail.com

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