The post-election economic imperatives
THE elections have been held. Resuscitating the economy and delivering on electoral promises are now the major priorities for the incoming Government. Headwinds remain, however, as Zimbabwe battles to end international isolation engineered by Western powers almost two decades ago.
Clearly, for any economy to grow sustainably, unrestricted access to global capital and markets is needed.
Unfortunately this has become a weapon for powerful states to impose their will on other nations.
If growth in bigger economies like Russia, Iran and, lately, Turkey slowed down in the face of restrictive economic measures, what more in smaller economies?
That said, efforts to reintegrate Zimbabwe into the global community began in earnest following the November 2017 resignation of Mr Robert Mugabe as President.
The new dispensation immediately adopted a two-pronged strategy to rebrand Zimbabwe’s image: firstly, re-engaging the international community; and secondly, enhancing the domestic business climate, including abolishing the 50 percent local ownership requirement under the Indigenisation Act.
To international observers, the conduct of the elections was naturally an important test for the new dispensation’s commitment to reform.
While the events leading to the elections were largely peaceful and showed a significant improvement from previous elections, it is the post-election violence, which claimed six lives, which has become the international talking point.
This was an unfortunate incident and President-elect Emmerson Mnangagwa rightly responded by setting up a commission of enquiry to investigate the tragic event.
So where now do Zimbabwe’s investment prospects stand after the elections?
It is crucial to separate the real motivation for investors from sentiments perpetuated by the global media. Investors are seldom influenced by emotions, but by factual financial merits of investment prospects.
That is the reason why even wartorn and volatile countries continue to see investment flows.
In fact, investment capital is constantly in search of the highest returns among competing global projects. This means the perceived risk simply needs to be justified by expected financial returns for an investor to allocate capital to a project.
Yes, Zimbabwe’s sovereign risk might be elevated, but the country also has lucrative projects in mining and agriculture, with globally competitive financial returns to match the increased risk.
As pre-requisite, though, investors need to have confidence in a country’s legal systems and institutions before they invest capital, no matter how enticing the potential financial returns.
They need the confidence that in the event of commercial legal disputes, their property rights will be respected and that they can seek recourse through a credible legal system.
The post-election socio-political upheaval will be yet another test for the credibility of Zimbabwe’s legal framework and strength of public institutions.
Such controversies around socio-political stability in Zimbabwe are likely to have different implications, however, on the two main sources of foreign capital flows — public and private capital.
Public capital is largely controlled by foreign governments; for example, foreign donations, foreign grants and loan approvals from multi-lateral institutions (IMF/World Bank/AfDB).
Due to the political nature of Zimbabwe’s challenges, influential Western governments are unlikely to agree on a common position in the short term.
The absence of Western governments’ financial support will mainly impact Zimbabwe’s health and educational programmes, as well as Government finances.
Government’s balance of payments accounts may require an alternative solution as IMF programmes are likely to be delayed.
To avert the ongoing cash crisis in the short term and restore confidence in the monetary system, an external financial rescue package coupled with some internal devaluation exercise is necessary.
Meanwhile, Government can reduce adverse impacts by reining in overspending, curbing illicit financial flows, clamping down on corruption and taking measures to reduce to country’s huge import bill.
Private foreign capital investment originates from private equity players, global private sector financial institutions, high net worth individuals and multinational companies, among others.
This has always been the new dispensation’s target.
In fact, the majority of the FDI pledges announced since the new dispensation took over, have been from private foreign sources.
The main challenge Government faces in achieving the over $1 billion in annual FDI flows into Treasury, therefore, is to make the domestic business environment conducive.
So what reforms should Government effect to boost inward foreign investment?
Basically, Government must nurture a conducive domestic environment for private businesses to be able to make competitive profits (relative to similar investments in other countries) and enable investors to repatriate their profits.
More importantly, the process of setting up the business and executing projects by prospective investors ought to be done with relative ease.
Radical steps must be taken to enable businesses to make competitive profits.
Tax reforms must be considered — to reduce the complexity of paying taxes; for example, introducing a universal tax system as opposed to complex, numerous taxes.
Fiscal incentives such as 10-year zero percent tax breaks must also be considered.
Reducing taxes should in fact increase Government revenues by attracting industry and increasing employment, thus, expanding the tax base.
Public-private partnerships into infrastructure projects must be pursued aggressively.
Where a company has to set up own infrastructure, incentives must also be applicable to make the overall investment worthwhile and attractive.
The repatriation of profits is also a major consideration for investors.
Government must fix the cash crisis in order to encourage the flow of funds through official channels.
Investors ought to be confident that their money can circulate in the economy and that they can deploy their money in international markets without risking punitive local penalties.
To improve the ease of doing business, the mooted one-stop shop must be rolled out.
The investment process must be simple, efficient and effortless.
In addition, Government must also work with neighbours to eliminate trade barriers and encourage free trade zones — free of tariffs and duties (a single market).
Government has to be ready to innovate solutions outside the norm.
Support from IMF programmes would no doubt provide an easy route out of current challenges. But other small economies that rely on IMF loans have often found themselves in perpetual debt spiral and have remained impoverished.
Zimbabwe, therefore, has a chance to chart its own future, and more importantly, create an economy owned by indigenous people.
The post-election socio-political upheaval will be yet another test for the credibility of Zimbabwe’s legal framework and strength of public institutions.