(Last Updated on December 6, 2015 by Editor)
ZIMBABWE – Finance minister Patrick Chinamasa last week presented the 2016 budget statement under the theme “Building a Conducive Environment that Attracts Foreign Direct Investment”. I was pleased to see that we have finally accepted that we cannot exist in isolation and Zimbabwe desperately needs to create a conducive environment in order to attract foreign direct investment (FDI).
This has been the theme of so many of my articles over the last year. Re-engagement with international financial institutions (IFIs), led by the World Bank, IMF, and African Development Bank (AfDB) was the first step towards normalisation of relations with the world.
The successful completion of the IMF-led Staff-Monitored Programme and settlement of the outstanding arrears with the IFIs in 2016 will pave the way for increased support from them and stimulate confidence among creditors, development partners and investors. It could be an inflection point for Zimbabwe as the risk of economic failure forces fast-track reforms. In a dollarised environment, government has little option but to re-engage with the international community.
The budget statement is somewhat progressive and takes into account the harsh economic conditions. Government has realised the importance of FDI and the need to create favourable conditions to attract investment. Unfortunately, the reality on the ground is somewhat different with investors reluctant to risk significant amounts of capital in Zimbabwe.
Government expects FDI inflows to increase from US$591 million in 2015 to US$614m in 2016. That’s less than 4% increase in FDI and is still well below the capital Zimbabwe requires to rebuild its economy. Zimbabwe needs to attract over US$1 billion a year for the next 10 years to be successful.
In order to attract such levels of FDI, Zimbabwe needs to urgently address investor concerns, in particular the indigenisation policy. Investors are looking for clarity, consistency and transparency in the implementation of indigenisation laws. Investors are looking for consistency and predictability rather than flexibility, which can be random.
I am pleased that government is taking a closer look at these policies and is expected to announce amendments before Christmas this year. I hope that the amendments will not only provide the much-needed clarity for investors, but also encourage inward investment.
The budget statement also addressed Zimbabwe’s outstanding debts. The resolution of external debt arrears to IFIs is to be achieved through a combination of the following strategies that government has put in place:
Use of domestic resources to clear US$111m arrears to the IMF;
Arrangement of bridge finance with regional and international banks to clear US$601m AfDB debt arrears; and
Use of a medium to long-term loan facility to clear US$1,1bn in arrears to the World Bank Group.
It is expected that the settlement of the arrears will take place in the first half of the year paving the way for Zimbabwe to receive increased financial support from the international community.
The growth target for 2016 was revised upwards to 2,7% from the projected 1,5% in 2015. Growth is expected to be driven by mining, tourism, and construction sectors. The agricultural sector is expected to recover by 1,8%, but a lot will depend on the impact of the expected El-Nino weather phenomenon.
I am less optimistic and expect growth in 2016 to be significantly lower. Commodity prices are likely to remain depressed for longer negatively impacting on the mining sector. The ongoing slowdown in China and the world economy will certainly impact on Zimbabwe. Growth is therefore likely to be flat at best and negative if Zimbabwe fails either to settle its arrears or create a conducive business environment.
Zimbabwe is operating well below capacity and there is urgent need to restore sustainable long-term growth. Historically, growth in Zimbabwe was driven by the agriculture, mining, manufacturing and financial services sectors. There was a symbiotic relationship between the various sectors that reinforced long-term growth. I’m pleased to see increased financial support for small-scale farmers and as well as the proposed levy for large farms. The levy will hopefully encourage greater use of land and enhance productivity.
Of concern is the trade deficit, which continues to expand despite the deteriorating macro-economic conditions. We are far too dependent on imports and the depreciating South African rand has made our exports less competitive. In 2015, exports are projected at US$3,4bn, against imports of US$6,3bn, giving a trade deficit of US$2,9bn.
Fuel imports account for over 23% of total imports and exceeds US$1,1bn while we rely heavily on exports of raw minerals like gold, tobacco, nickel and ferro-chrome. Zimbabwe needs to focus on value addition and export of finished or semi-finished products. It also needs to focus on boosting agricultural exports, which historically provided significant export receipts.
I’m also concerned with the deflationary trend that is starting to take hold in Zimbabwe. Zimbabwe is importing deflation from South Africa where the weakening rand continues to reduce the cost of imports from that country. I have written about the evils of deflation in the past and will not cover old ground. If gone unchecked, deflation can be a destabilising force.
Overall, the budget statement was progressive and recognises the challenges facing the economy. Chinamasa announced bold measures to address Zimbabwe’s outstanding debt while recognising the importance of creating a conducive environment for trade and investment.
Re-engagement with the international community is a critical part of this process. Government needs to rally behind the minister and speak with one voice. The state visit to Zimbabwe by the Chinese President Xi Jingping is an important milestone for Zimbabwe. More on this next week.