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Zimbabwe’s “progressive” changes to indigenisation

Zimbabwe’s “progressive” changes to indigenisation

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Published: 5 January 2016

 

ZIMBABWE – Zimbabwe has relaxed certain aspects of its indigenisation act which, historically, has been blamed for scaring off prospective investors.

The amendments have been announced by finance minister Patrick Chinamasa over the course of the past few weeks, during which time the government has negotiated improvements to the framework.

The Indigenisation and Economic Empowerment Act of 2007 was an initiative by President Robert Mugabe, and compels foreign firms to give 51% of their shares to local partners. While the new guidelines stick to this shareholding rule, they advocate a delay in the time foreign investors have to sell a majority of their holdings and even allow them to escape the provision by paying a fee (the Indigenisation Compliance and Empowerment Levy).

“A non-indigenous business may hold the majority shareholding for a period ranging up to five years except for the energy sector, which can go up to 20 years,” reads a government statement.

“Existing foreign-owned companies may continue to operate in all sectors of the economy but shall be required to pay an indigenisation compliance levy as a trade-off for non-compliance,” the statement continues.

According to Omen Muza, managing director at TFC Capital (Zimbabwe), the new framework is “most welcome” as it officially confirms the “flexibility” that the Zimbabwean government has been selectively applying to some investment deals.

“It does away with the previous discretionary dispensation which was seen as aiding and abetting corruption and red tape. My view is that the new carrot-and-stick approach whereby those who do not comply pay a levy while those who comply pay nothing is progressive because it punishes bad compliance behaviour while rewarding good behaviour. The lengthy compliance period of up to 20 years is also helpful, I think,” he tells GTR.

He explains that the new framework is an admission that, with FDI inflows of slightly over US$0.5bn (which pale in comparison to what regional peers such as Mozambique and Zambia rake in), “Zimbabwe faces stiff competition for foreign suitors and has to be more practical and aggressive about attracting investment”.

However, Muza warns that the new law’s capacity to improve investment flows has to be linked to the overall ease of doing business in the country. “Zimbabwe still has deep structural issues, such as power shortages, which need to be addressed. For instance, Aliko Dangote wants to invest in a cement manufacturing plant, but has to first think about spending money on a power plant,” he adds.

In a surprising move, Zimbabwe recently announced that it would shift to the Chinese renminbi (Rmb) as its reserve currency as part of a deal that will see about US$40mn in debt cancelled by Beijing.

While the Rmb has, on paper at least, been part of the country’s basket of currencies for almost a year now, its usage to date has remained limited, if not non-existent. “Zimbabwe’s limited productivity means it doesn’t export enough to China to earn meaningful amounts of yuan for its own import requirements,” explains Muza. “However, Zimbabwe may benefit from ‘quick wins’, such as tourism, by allowing Chinese nationals to pay for their tour packages in yuan.”

He goes on to tell GTR that the adoption of the Rmb may offer Zimbabwean banks some respite as an alternative settlement currency going forwards – especially those whose correspondent banking relationships and dollar-denominated accounts have been terminated due to rising compliance concerns. “Beyond this, I don’t see the adoption of the yuan in itself significantly improving the country’s trade prospects in the short term before domestic productivity improves,” Muza concludes.