daniel chigunwe
Economy Uncensored with Tapiwanashe Mangwiro
Zimbabwe has long grappled with liquidity shortages, with its financial system burdened by the twin challenges of maintaining monetary stability and fostering economic growth.
The Reserve Bank of Zimbabwe (RBZ) has adopted stringent monetary policies to prevent the creation of “fake” United States dollar balances in the formal banking system.
Among these policies is the maintenance of high statutory reserve ratios of 15 percent on call and 20 percent on deposits, which, while necessary to maintain monetary discipline, significantly constrain liquidity.
In this environment, traditional lending institutions, such as banks, face limitations in extending credit to various sectors, particularly to riskier segments like startups and innovative enterprises.
In such circumstances, venture capital (VC) becomes a critical financial instrument to support economic growth, innovation and job creation. By providing early-stage funding to startups and small businesses, venture capital can catalyse entrepreneurial activities that are often overlooked by conventional banking institutions.
Moreover, VC funding alleviates pressure on commercial banks, enabling them to focus on financing large-scale infrastructure projects, which are equally vital to Zimbabwe’s long-term development goals.
The liquidity challenge: A roadblock to growth
Zimbabwe’s liquidity challenges stem from several factors, including its reliance on foreign currency, fiscal imbalances and limited access to international credit markets.
To maintain monetary stability, the RBZ has implemented conservative monetary policies, such as high statutory reserve ratios. These ratios are intended to protect the banking sector from creating unsustainable deposits that may not be backed by real foreign exchange, which in the past led to hyperinflation and economic collapse.
While these measures are crucial in preventing a repeat of the financial instability witnessed in previous years, they also limit the banks’ ability to extend credit to the broader economy.
Startups and small businesses, which are inherently riskier and often lack collateral, find it particularly challenging to access credit under such conditions.
This creates a financing gap that stifles innovation and entrepreneurial activity, both of which are key drivers of economic growth and diversification.
Venture capital: Filling the financing gap
Venture capital provides a unique solution to this financing gap by offering equity-based funding to startups and early-stage companies. Unlike traditional lenders, venture capitalists are willing to take on more risk in exchange for the potential for high returns.
This risk tolerance makes VC funding ideal for innovative sectors such as technology, agriculture, renewable energy and manufacturing — industries that have the potential to drive Zimbabwe’s economic transformation.
The introduction of VC funding into Zimbabwe’s economic landscape would address several critical needs. First, it would provide much-needed capital to young companies that have innovative ideas but lack access to traditional financing.
Second, it would foster a culture of entrepreneurship, encouraging individuals to start new businesses, create jobs and contribute to the overall economic dynamism.
Third, by supporting startups in their early stages, venture capital would help incubate the next generation of companies that could grow into significant contributors to the national economy.
Reducing pressure on banks
Another significant advantage of VC funding is that it reduces pressure on traditional banks, freeing them up to focus on financing major infrastructure projects. In a liquidity-constrained economy like Zimbabwe’s, banks face competing demands for limited resources.
On one hand, they must support day-to-day economic activities by providing working capital to businesses and individuals. On the other hand, they are expected to finance long-term infrastructure projects that are essential for national development.
By channelling more of the high-risk, early-stage financing needs to venture capitalists, banks can prioritise lending to sectors that are critical for long-term economic growth.
Zimbabwe is currently undertaking several major infrastructure projects, such as the modernisation of the Beitbridge Border Post, housing developments, road construction and dam projects.
These projects require significant capital investments and long-term financing that banks are better suited to provide.
The presence of a robust venture capital ecosystem would allow banks to allocate their limited resources more effectively, focusing on these large-scale, capital-intensive projects without being distracted by the smaller, riskier segments of the economy.
Fostering innovation and economic diversification
In addition to easing the burden on banks, venture capital plays a crucial role in fostering innovation and driving economic diversification.
In a global economy increasingly driven by technology and innovation, countries that invest in startups and tech-driven companies position themselves to be competitive in the future.
Zimbabwe has significant potential for innovation, particularly in sectors like fintech, agritech, and renewable energy.
Fintech, for instance, has already demonstrated its potential to transform financial services in the country, with mobile money services like EcoCash playing a central role in financial inclusion.
However, to fully capitalise on this potential, Zimbabwe needs a steady flow of capital into these high-growth sectors, and venture capital is well-suited to provide that funding.
VC funding also helps nurture a vibrant startup ecosystem by providing not only capital, but also mentorship, business development support, and access to networks.
This ecosystem can create a multiplier effect, where successful startups reinvest their profits into the next generation of entrepreneurs, creating a virtuous cycle of innovation, growth, and job creation.
Conclusion: A strategic imperative
In a country like Zimbabwe, where liquidity shortages are a constant challenge, venture capital represents a strategic imperative. It offers a solution to the financing gap faced by startups and small businesses, fosters innovation and reduces the pressure on banks to finance high-risk ventures.
By freeing up banks to focus on major infrastructure projects, such as housing, roads, and dam construction, venture capital can play a complementary role in driving the country’s economic growth.
For Zimbabwe to achieve sustainable growth, it must embrace venture capital as a critical component of its financial ecosystem.
This will require creating a conducive regulatory environment, offering incentives for venture capitalists, and promoting the development of incubators and accelerators to support startups.
If Zimbabwe can successfully tap into the potential of venture capital, it will be well-positioned to drive innovation, create jobs, and diversify its economy, even in the face of ongoing liquidity challenges.
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn
Bongani Ndlovu