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Why Zimbabwe’s Foreign Direct Investment Dries Up

Foreign direct investment is crucial for industrial development due to the fact that it offers a unique combination of long-term finance, technology, training, technical know-how, managerial expertise and marketing experience. Most of developing countries, see foreign direct investment as a panacea for augmenting domestic savings, generating employment, eradicating poverty and stimulating economic growth.

The idea of Foreign Direct Investment (FDI) is a category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise that is resident in another economy. Ownership of 10 percent or more of the ordinary shares of voting stock is the criterion for determining the existence of a direct investment relationship. The investment could be in manufacturing, services, agriculture, or other sectors. It could have originated as green field investment (building something new), as acquisition (buying an existing company) or joint venture (partnership).

The role played by FDI as a source of capital which augments domestic savings is attracting close attention in all developing countries. For developing nations such as Zimbabwe FDI jurisdiction is very important. The southern African nation is one of the countries in the world with 60 tradable minerals and top important minerals such as gold, platinum, diamond, coal and nickel. It is a remarkable resource center and its diversified economy makes it an attractive destination for investment, not forgetting to mention the good climate. The priority areas for investment include mining, manufacturing, tourism, ICT and infrastructure development. Zimbabwe has three main avenues for fostering foreign investment into Zimbabwe. These include the Zimbabwe Investment Authority (ZIA), Zimbabwe Stock Exchange (ZSE) and the Reserve Bank of Zimbabwe (Exchange Control).

In Zimbabwe, local companies are allowed to make outward foreign direct investments into foreign or offshore markets, subject to meeting Exchange Control criteria. Cross border investments can be in the form of offshore branches or subsidiaries. The payback period for all investments funded from Zimbabwean resources should not exceed four years. A key contributor to Zimbabwe’s perceived status quo is the economic policy consistency deficit that has dogged the country over the past decade.

Property rights are consistently an important explanatory variable of FDI in Zimbabwe, even after controlling for periods when there are no significant new foreign capital inflows. Rampant property rights violations began in Zimbabwe in the year 2000.This happened during the government’s land reform program which saw thousands of white local and foreign farmers evicted from their farms without following due process. Thousands of farm workers were also displaced in the process. Historical imbalances in land distribution needed to be addressed. The need to redistribute land in Zimbabwe for inclusive and sustainable growth is not disputed. The state, however, violated the rights of the existing owners during the fast track land reform programme.

From independence in 1980 until 1991, the government was very defensive toward foreign investment, subjecting each proposal to careful scrutiny and requiring foreign investors to get permission from the Foreign Investment Center for the development of any new enterprise in Zimbabwe. Enterprises could be 100% foreign owned, especially in priority areas, but there was (and is) in effect a strong preference for joint ventures with at least 30% local participation.

President Robert Mugabe’s forced resignation and subsequent policy changes provide prospects for increased inflows of FDI to Zimbabwe. While the new government of President Emerson Mnangagwa’s government has been slow to follow through on reforms to improve the ease of doing business, and a protracted currency crisis strains the economy. The Transitional Stabilization Program, announced in 2018, includes structural and fiscal reforms that, if fully implemented, would resolve many of the economy’s fundamental weaknesses. The new government did move quickly to amend the restrictive indigenization (local ownership) law to apply only to the diamond and platinum sectors, opening other sectors to unrestricted foreign ownership. The government announced its commitment to improving transparency, streamlining business regulations, and removing corruption, but the last two years have brought only modest progress.

Foreign direct investment has a very significant positive impact on economic growth. Adequate FDI inflows generate employment opportunities, augments domestic, foreign exchange reserves, upsurges positive technological externalities and human capital skills. Zimbabwe’s sectors that attract the most investor interest include agriculture (tobacco, in particular), mining, energy, and tourism.Investors appreciate higher education levels of Zimbabwean workers. Most of the FDI in Zimbabwe over the period was resource seeking in the mining (gold, diamonds and platinum) sector.

In fact, in 1998, FDI reached over $444 million and by 2001, FDI inflow fell heavily to $5.4 million. FDI flows revived since 2008 due to the so-called process of economic normalization and the development of the country’s business climate, although FDI remained far below their prospective. In 2018, total FDI stock stood at USD 5.4 billion and represented 20.8% of the GDP. The FDI inflows increased significantly to USD 745 million in 2018, compared to the pre – crisis period and 2017 (USD 349 million), as noted in the UNCTAD’s 2019 World Investment Report.

Consequently, the UNCTAD’s 2020 World Investment Report indicate that, FDI inflows decreased significantly to USD 280 million in 2019, contrast to the pre – crisis period (USD 745 million in 2018). In the same year, the total FDI stock reached USD 5.7 billion.

Although FDI inflows to sub-Saharan Africa has increased significantly, Zimbabwe has not benefited from this boom. External debt was found to be statistically insignificant and negatively affecting economic growth in Zimbabwe. Established in the 2021 National Budget, the total external debt was US$8.2 billion of which 77% (US$6.34 billion) are arrears, as at September 2020, with domestic debt pegged at ZW$1. 547 billion.

Nevertheless, the government spent ZW$378. 5 million on interest payment for government debt in 2019 and in 2020 they anticipated spending ZW$1 billion, mainly servicing domestic loan which as of 30 September 2020 was ZW$12. 5 billion. Despite the fact that the government has been using inflation and exchange rate to reduce its domestic debt. Token payments have been made towards servicing active external debts. This strangles economic growth and expands country risk for new investment.

Simultaneously, this has seen Zimbabwe receiving lower foreign investment levels than many of its counterparts in Southern Africa. In the last three years, FDI in Zimbabwe has stalled as a result of several factors, such as gross fixed capital formation, inflation, trade openness, corruption, political instability, weak export competitiveness, environmental regulations, regulatory duplication, the legal system and taxation regime, uncertainty concerning protected areas and disputed land claims, infrastructure, socioeconomic and community development conditions. Others include trade barriers, labour regulations, the quality of the geological database, security, and labours and skills availability, and inconsistent government policies hinder FDI inflows to Zimbabwe.

Zimbabwe’s FDI declined sharply to $280m in 2019 after more than doubling to $745m in 2018 from $349m in 2017. Figures from the Reserve Bank of Zimbabwe (RBZ) show a further decline during the first half of 2020 to $71.2m compared to $111.6m recorded in the same period in 2019. A look at the above numbers largely shows an economy with underlying challenges. This indicates that FDI does not have an exogenous effect on economic growth, but its effect is manifested through trade openness. The contribution of human capital to economic growth in the long-run was, however, doubted.

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In 2020, electricity accessibility significantly improved, aggregate demand dampened further, particularly in the first half of the year. This was as a result of hyperinflation. Companies also continued to face obstacles in sourcing of foreign currency for procurement of imported raw materials. Modification to the forex interbank in the second half helped drive forex availability up resulting in production recovery across industry in the second half. Large numbers of companies operating in Zimbabwe, including Lafarge, Hwange, Star Africa, Falcon Gold, RioZim, to name a few, are functioning with old machinery, which would typically breakdown more often than usual and hence lower capacity usage. This continues to the downside the challenge as there is no hope for recapitalisation in sight as early as 2021.

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Foreign direct investment in the mining sector has a significant positive relationship with the country’s GDP in the long run. Mining FDI is revealed to have relatively higher effects as compared to FDI in non-mining sector and domestic investment. Economists say mining FDI as well as non-mining and domestic investment still has positive and substantial impacts on growth but at a relatively lower extent. This entails that it takes some time for such investments to have their full consequence on the economy.

The quality of inward FDI, policy and institutional frameworks and the new government’s posture on innovation will largely determine whether and how technology will catch up. Directing inward FDI towards technology catch-up and innovation in general can affect Zimbabwe’s industrial productivity, economic growth and ultimately development. Zimbabwean Information Minister Monica Mutsvangwa note that Zimbabwe has primed itself to attract more foreign direct investment from China, after implementing robust economic reforms over the past few years. In January 2021, the government granted Great Dyke Investments a five-year tax exemption.

Earlier this year, the government “deleted” a modification of the Finance Act, which had given it the latitude to own 51% of mining firms. A new Mining policy framework is the pipeline, which, according to the government will straighten out unresolved issues in Zimbabwe’s mining sector- a document that has been brewing for 13 years.Projections in the crucial mining sector indicate that the country is primed to surpass its target of a US$12 billion economy by 2023 with the increased capacity utilisation in the manufacturing sector set to drive economic growth towards Vision 2030 to make Zimbabwe an upper middle income economy.

The Ministry of Mines and Mining Development increased mining and registration fees by over 800% after fixing them in United States dollars in March, 2021. The Zimbabwe Miners Federation (ZMF) contended the initiative was going to amputate their operations and shut out new entrants. The government made a historic U-turn decision on mining fees as it reverted to old mining and registration fees. Among the multi-million dollar projects that Zimbabwe is pursuing is a joint venture between the country and China’s largest steel making giant Tsingshan worth more than US$1 billion, which is expected to be a game changer for the mining industry not only in Zimbabwe but in the Sadc region as a whole.

Investors need assurance that there is a fair and non-discriminatory framework in terms of the investment in Zimbabwe. Government should overhaul its macroeconomic policies in order to create a stable and hospitable investment climate that fosters export competitiveness, trade openness and domestic capital formation. On the basis of the adoption of policies that improve domestic absorptive capacity, such as the elimination of uncertainties in the economy, promoting more trade openness, improving market size and liberalisation of credit and financial markets to reduce firm borrowing costs.

While explicit FDI and innovation policies are encouraged. Zimbabwe’s GDP would probably be enhanced by embracing and incorporating additional measures that would facilitate an increase in the country’s output such as increasing capacity in the mining industry and the agricultural sector as well. In addition, limited government interference in the industry, decentralization and opening up of more local and foreign tourism promotion centres, application of lower tax rates across industries and the general creation of a favourable environment for the effectiveness of tax incentives. Additionally the country should adopt sound economic policies that minimises country risk, political instability and corruption in order to attract adequate FDI inflows.

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