A reflection on domestic capital constraints
IT IS inexorable human nature to look at the speck in one’s eye while ignoring the log in oneself.
A common refrain of most Christians is that God helps those who help themselves.
These two key points are relevant to Zimbabwe’s current efforts in mobilising capital to kick start the economy.
The global financial crisis proved the futility of continued dependence on foreign capital, mainly foreign aid.
Even foreign direct investment will continue to be depressed as companies cut back on spending abroad.
Ironically, it is foreign capital that Zimbabwe currently needs the most.
As such, we have not fully explored measures to unlock domestic capital.
Surely, we can’t expect foreigners to invest in our country when we shun it.
There is a glut of money circulating in the informal sector at a time when industry is in dire need of the capital to retool and finance its working capital requirements.
Estimates varying from US$2,7 billion to US$6 billion, or 19 percent to 43 percent of GDP (gross domestic product), have been put forward as money circulating outside the formal system.
Quite often this amount of money is used to fund a grey market and rent seeking activities as formal investments remain unattractive. There is a known constituency of filthy rich individuals in Zimbabwe who live opulent lifestyles; in most cases, funded through asset stripping.
It is common to find individuals who live ostentatious lifestlyes that cannot be traced to any known investment, underlying how dealing and rent-seeking behavior has become rampant.
The collective wealth of many locals can ably meet the investment requirements of some firms.
The US$15 billion diamond revenue that leaked from Chiadzwa diamond mining ventures could have made a difference to the local economy.
It is reasonable to conclude that a huge chunk of the money was either externalised or used to fund opulent lifestyles. Some of our locals are counted among the wellto-do in the region and the world, they stay in world class mansions and drive expensive cars. Others are known for shelling out money on luxuries and social activities whilst their companies falter from capital constraints.
What is more worrying is the high preference for foreign investments or savings by our nationals which has resulted in dis- comforting levels of capital flight. Reserve Bank of Zimbabwe estimates that about US$1,8 billion was externalised by individuals (US$600million) and corporate ($1,2 billion) in 2015 alone. The high level of capital flight is an indication of an environment not conducive to investment.
It’s a folly to expect foreigners to invest in a country that is shunned by local investors.
Ironically, the high preference for foreign investments is despite the availability of plenty investment opportunities in Zimbabwe. A country like Zimbabwe, which is richly endowed with natural resources and admired by the world over, should be swimming in capital and yet the opposite is true. It is reported that Zimbabwe has 29 sought after minerals, her climate is admired all over the world and she is stra- tegically located. Also, Zimbabwe’s human capital is the envy of many.
The country has an estimated 13 million tonnes of gold; 2,8 billion tonnes of platinum ore; 930 million tonnes of chromite; 4,5 million tonnes of nickel; 30 billion tonnes of iron ore; 5,2 million tonnes of copper and 26 billion tonnes of coal and the largest reserves of coal bed methane in Southern Africa.
Her tourism sector hosts some of the Seven Wonders of the World and is centrally located in Sub-Saharan Africa.
All these factors have done very little to entice our local players to invest in their country.
There is definitely need to seek an
answer to this and intervene with a working solution.
It is arguable that the country’s investment policies are not conducive to attract and retain capital.
There is need to revisit these policies to unlock the muchneeded capital for growth, which is what the Office of the President and Cabinet is doing.
Those who lived during the period of price controls know all too well how such regulations can cost business.
Shortages of cash and foreign currency and resultant black market activities were the main source of headaches among entrepreneurs, which saw a number of them quit during the crisis.
The loses that were incurred from bank closures, hyperinflation and dollarisation cannot be swept under the carpet, even by the passage of time.
What further scares investors is that some of the challenges did not disappear even after dollarisation in 2009.
Cash challenges have re-emerged and it has become increasingly difficult to remit money outside the country.
Some banks are facing foreign payment backlogs dating back to as far as six months, to the detriment of business viability.
Policy inconsistency has been a significant drawback to the ease of doing business in Zimbabwe as it makes planning difficult.
An unpredictable regulatory environment has cost a number of businesses.
For example, there are businesses that closed shop because Government suddenly decided to increase the duty on imported chickens when containers of the product were still in transit.
Last year, industry could not help but panic as the confusion surrounding the March 31 2016 deadline for compliance with Indigenisation law reached fever pitch.
It had to take the intervention of the President to clarify the law.
All these factors have been deterring locals to invest in the country.
The current blitz by Zimra as it intensifies its tax collection has spooked many businesses.
In a number of cases, businesses have had to close shop as the authorities squeeze them of the little resources they have.
There currently is a dilemma where Government, which is starved of resources, is having to burden strained taxpayers and companies in an effort to raise more money.
Fuel dealers, mobile network providers and liquor manufactures and dealers have naturally been on the receiving end.
Also, in some cases, the high level of corruption has been a discouraging factor. The numerous reported cases of the goings on at the State Procurement Board are quite telling.
Quite often Government tenders are won by those who are well connected and they usually under deliver, disadvantaging deserving candidates while milking Government in the process.
However, little precious action has been taken to restore order and sanity in the public tendering system.
It is however, comforting that steps are underway to sort out the mess.
All the above factors have had a negative impact on the ease of doing business in Zimbabwe.
In the recent World Bank ease of doing business ranking, Zimbabwe slipped three placed to number 161 out of 189 as investor sentiments are taking long to soften.
The score was largely weighed down by the time it takes to register a company, registration and protection of property rights, regulatory and bureaucratic challenges, and dealing with construction permits and insolvency, among other issues.
There would be need to expedite the ease of doing business reforms to enable the country to attract and retain more domestic capital.
A better traction in the implementation of ease of doing business reforms is expected now that the function is being handled from the Office of the President and Cabinet.
A reflection on constrains to the flows of domestic capital in Zimbabwe gives us an indication as to why it has also been difficult to attract and retain foreign capital, mainly FDI.
Before we blame external factors for limited flow of capital, we need to self-introspect and rectify where we are falling short.
We can’t expect foreigners to have confidence in us when we don’t have confidence in ourselves.
The fol lowing advice is proffered to improve the flow of domestic capital: Foster policy clarity and consistency. Bring sanity to the tender board. Free up the economy through reduced regulations. Protect property rights. Address cash challenges and foreign payment backlogs. Deal with corruption whole-heartedly. These policy advices can be summarised under the need to expedite the easy of doing business reforms
Persistence Gwanyanya is an economist, banker and member of the Zimbabwe economic society who writes in his personal capacity. For feedback use his Whatsapp number +263 773 030 691