adminZimbabwe currently does not have a balanced trading relationship with the rest of the world. We are currently running a trade deficit with many countries and as a whole we import much more than we export. If one looks at the effect of this on the current account, you will notice that we have a large current account deficit.
This deficit must be offset by our capital/financial account. This is the account that gives cumulative numbers of foreign assets owned by Zimbabwe versus Zimbabwe assets owned by foreigners. This is not a scenario that is exclusive to Zimbabwe, but is seen in many economies around the globe.
China, for example has got very large trade surpluses – they export more than they import. And the United States has the largest trade deficit in the world. (Month of October it was over US$40 billion). Now for Zimbabwe to pay for its import bill, we export goods and services, receive diaspora income and foreign aid but we also have to sell assets as well to make up the difference.
Now because Zimbabwe doesn’t have its own currency we export United States dollars to make up the differences from the current account deficit. But we only have a certain amount of United States dollars. What are we doing with them?
We are buying second hand Japanese cars. Instead of investing the money into productive businesses, they are getting squandered on cheap imports and depreciating consumer goods. Yes we get a lot of stuff but everyday our total capital base decreases and this makes us poorer. Many countries have faced these problems and perhaps Zambia is the best country to compare us with.
Zambia has faced many problems in their economy, similar to those faced in Zimbabwe. They have faced large current account deficits, which have been financed by loose monetary policy. Contrary to popular belief, inflation was not originally defined as rising prices and vice versa for deflation. This is just the most accurate way of measuring the effect of inflation.
Inflation is an increase in money supply. How inflation manifests itself is usually in rising prices. So like Zimbabwe, Zambia tried to pay for their trade deficit by increasing their money supply. This inflation caused their currency to become devalued and it was realized in Zambia that one couldn’t finance trade deficits with paper money.
Zambia is by no means a perfect, or a strong economy but they are moving in the right direction. Zambia’s GDP in 2012 was approximately US$24.3 billion.
This is higher than the economy in Zimbabwe at about US$10.8 billion. In the chart above we can see the growth rate of Zambia’s economy compared with Zimbabwe. Clearly Zambia has had a much better economy during this period, even with the collapse of the copper price, they have continued to grow.
A look at Zimbabwe tells the whole story, a decade long depression occurred and now we are starting to see a recovery in our economy based on having a viable currency. Unfortunately the path we are on currently is unsustainable.
Foreign direct investment is simply investment into a country (host) by residents of another country (source). There is a very important difference between direct investment and portfolio investment. Portfolio investment takes place where foreign investors buy stocks or bonds in the host country. They do not exercise any control or significant influence.
Now there is some FDI that takes place in the stock market. For example, Investec’s (SA) investment into OK Zimbabwe. They exercise significant influence and have allocated OK’s resources more effectively than they were allocated before the investment. Direct investment usually involves investing money and expertise into infrastructure and production.
When a foreign investor builds a factory in Zimbabwe, this investment constitutes FDI. We need foreign direct investment for two reasons in our opinion. The first being the capital- we need capital to build factories or to buy machines and build infrastructure to make us more productive.
The second reason we need FDI is for the skills and the technological knowledge that makes the rest of the world more competitive than us.
There are secondary effects that can take place as a result of FDI. One of these effects is the effect on the total capital base available. When money comes into Zimbabwe in exchange for idle assets, the capital base increases.
When the capital base is increased, we now have more money that can be used to grow the economy. Some of the idle assets and the huge unemployed population, most of which is perfectly capable of being productive, start to be allocated more efficiently, and as a result, production increases.
Another secondary effect, which is likely to take place, is the increase in the skills of the labour force in Zimbabwe. The more skilled the labour, the higher the market wage for that labour.
We need to increase the incentive for businesses to invest in Zimbabwe. And we need to do it strategically. There has forever been a problem in Africa where foreign investment has always been seen as extracting mineral resources cheaply and without developing the host economy in the process.
The reason for this is that the structures and incentives for developing the local economies have not been there. The biggest problem has been corruption.
Corruption has long been a big problem around the world but more specifically in Africa. Investors have used bribes to high influence individuals in order to take resources cheaply. Why should a businessman compete in the market when he can just pay a bribe. We need total transparency of FDI inflows into this economy and certain structures to encourage development.
How do we get FDI and how do we make the most of it? We get FDI by making our country an attractive investment destination. Zimbabwe has most of the attributes of an attractive investment destination. We lack in clarity on how we are managing our country and in cooperation with the rest of the world. The Indigenisation law is perhaps the biggest deterrent to FDI.
Under the indigenisation law, even though the foreign investor provides 100percenrt of the capital, the investor is taxed effectively at 63.35 percent. This is due to the fact he has to cede 51 percent to indigenous persons and then is taxed at 25 percent of his total ownership of 49 percent.
We need these issues clarified before any meaningful investment will take place. Secondly we need to distinguish what we want from FDI and how to get it. We want FDI into productive sectors of the economy and into export production or import substitution production.
We don’t want FDI into retail just profiting off our demand, which is a result of our savings and production. We want our own labour to be used in the production that comes from FDI so we need to make it more attractive to use local labour and train our labour in the production.
Training is what is really going to empower our people. Skilled labour, as a result of training, fetches much higher wages in the market place than unskilled labour. Moreover we have plenty of young entrepreneurs who would be able to take advantage of the increased capital base.
Training does not happen in universities, training happens in the workplace where the business owner directly profits from how skilled his labour is. Secondly, we need to have certain tax regulations that again, incentivise businesses to keep much of their profits in Zimbabwe.
We must not be weary of capital arbitrage. We can do this so easily and so quickly and its effect on our capital base and liquidity situation will be enormous.
Not to mention the increased tax revenues which will be derived from the higher production, which can be used to help develop this economy further with more money spent on infrastructure which makes us more productive as an economy.
Zimbabwe is blessed with natural resources in the form of minerals and fertile land and climate. But the real resource we have is our dwindling capital base. That capital is the result of savings. This trading imbalance is eating away at our savings as a nation.
We seem so concerned with protecting these natural resources instead of focusing on the resources that were earned and are now being diminished.
Lets now look at the effect that FDI has had on a country that has embraced it under similar circumstances. For this, I believe Zambia is the most relevant comparative due to its similarity in economic structure and comparative advantages. Zambia has had large FDI into their economy during the last 5 years.
According to UNCTAD, from 2007 to 2012 Zambia received US$6,8 billion in FDI (average of US$1,1billion per year). This has resulted in the cumulative stock of FDI in Zambia at US$12 billion as at 2012. Zimbabwe on the other hand has not been as effective in attracting FDI and during the same period received FDI worth just US$1,1 billion (average of US$196 million per year).
Zimbabwe currently only has cumulative stock of FDI of US$2,6 billion.
This article was written by Zimnat Asset Management for FinX.
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