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Assault on property rights closes Zimbabwe for business

19 Jul 2020 at 07:00hrs | Views
The government directive to suspend the Zimbabwe Stock Exchange (ZSE) operations on the 26th of June 2020 and the recent political threats to eject Old Mutual Zimbabwe, PPC and SeedCo International from the stock exchange all but ends Zimbabwe's open for business mantra. The 26th of June directive also compelled mobile money operators (MMOs) to suspend operations even though the regulator (RBZ) later clarified the position by only banning mobile money agents, merchant to merchant transfers and merchant to individual transactions in a move meant to curb Illicit Financial Flows (IFFs). The ZSE operations date back to 1894, even though the current trading format started in 1993 when the stock exchange was opened to foreign investment. The stock exchange market operations are supervised by the Securities and Exchange Commission of Zimbabwe (SECZ) under the purview of the ministry of finance. As of the suspension date, the market capitalization for the 57 entities trading on the ZSE was Z$228.58 billion which translates to US$3.47 billion if the auction rate is used and US$2.54 billion if the parallel market rate is used.

The recent knee jerk announcements add to threats of farm grabs around the country where a number of farms owned by white commercial farmers have been targeted around Marondera and Macheke in Mashonaland East. The recent threats and ultimatums to established farmers follow an announcement by the government that farm sizes are going to be resized in all the country's ecological regions in line with recommendations from the Lands Commission which is auditing all farmland. According to the new regulations gazetted on the 14th of February 2020, under Section 21 of the Land Commission Act of Zimbabwe (Chapter 20:21), All farms in natural Region 1 should be below 250 hectares while those in Region 2 must below 500 hectares. Natural Region 3 farms should be below 700 hectares whereas those in Region 4 must be under 1 000 hectares and those in Region 5 below 2 000 hectares.

The key concern on the recent assault on property rights is that the government of Zimbabwe is acting unilaterally without consulting the responsible authorities such as SECZ, ZSE and RBZ who are then supposed to institute investigations on any unlawful or suspicious business activities and then inform the affected parties through proper channels so as to instill institutional integrity. Institutional integrity is key to upholding property rights in any country without which Zimbabwe will perennially struggle to attract any investment and grow its economy in the near future. The recent directives paint a horrific picture to the global village that in Zimbabwe political interests matter more than the country's economic growth or stability.

Tainted History
In 2009, the central bank raided foreign currency accounts belonging to various depositors and walked away with over US$400 million. In the past, asset seizures were reported for land or mining claims belonging to Zimbabwe Platinum Mines (Zimplats), African Distillers (Afdis), Zimbabwe Alloys (ZimAlloys), RioZim and Diamond Mining companies in the Chiadzwa area. Equally damaging was the outright disregard of high court orders in the Gaika Mine (Kwekwe) case where investor property rights were trashed for political reasons. Close to 2 decades after the Land Reform program, politically connected farm invasions or threats were reported at Lesbury Farm (Rusape) in 2017 and then in 2019 at Farfell Coffee Estate (Chipinge) in Manicaland province. All these events send jitters to potential investors and are the major reasons why Zimbabwe ranks very low on the investment destination ladder in SADC where Zambia, South Africa and Mozambique are doing particularly well on Greenfield investments.

Persistent challenges to lure FDI
Foreign Direct Investment (FDI) Inflows in Zimbabwe plummeted from US$717 million in 2018 to US$259 million in 2019, highlighting the country's renewed challenges to attract long term investment despite the abundance of opportunities in the local market.  Short term investments as represented by portfolio investments (investments in local financial securities and equities) also plunged by more than 93% to US$3.7 million in the same period, indicating a sharp deterioration in the investment climate within the last 12 months. In the first quarter of 2020, foreign investors bought a monthly average of just above US$1 million worth of shares on the local bourse, down from a monthly average peak of US$26 million in 2013. As such it is fair to say most investors had adopted a wait and see attitude on the country's open for business mantra and the unfolding events are vindicating their fears on Zimbabwe.

Gloomy picture for VFEX
The government announced that it will soon launch the Victoria Falls Securities Exchange (VFEX) as part of a broader plan to turn the renowned resort town into an offshore International Finance Centre (IFC). The VFEX will be managed by the Zimbabwe Stock Exchange and liberalized to trade in foreign currency only. The ultimatum to suspend the local bourse all but taints such plans as investor confidence cannot be built through abuse of property rights or decisions shrouded in secrecy from the same government that seeks to quote global investment.

Open for business assessment
Even though Zimbabwe climbed 15 places on the ease of doing business rankings to 140 out of 190 ranked countries and amended its Indigenization and Empowerment Act which required 51% local ownership, not much has been done to protect property rights so as to sustain the open for business policy. The same applies to the much needed governance and institutional reforms that could provide economic stability in the country. The government itself has been at the forefront of violating court orders while property rights violations by politically connected citizens have not be condemned or punished. Government agencies still maintain a regime of redundant and cumbersome procedures for setting up new business operations, exporting or importing commodities into the country. Investing in agriculture and mining are of particular concern to potential investors as they are shrouded in secrecy and often require political favour. This has provided fertile ground for high level corruption which only attracts dubious investors.

The recent command style directives paint a very bad picture on Zimbabwe as an unsafe investment destination where even the stock exchange can be shut down without consultation of the regulator or proper explanation of the motives to the hundreds of investors that will be impacted by such a directive. The selective application of the law and outright disregard for guarantees to property rights have no place in a country which parades itself as open for business and competes for the same foreign investment with its regional peers. Investors want an investment environment where their property is protected by the law (Independent Judiciary) and not by political interests as those constantly change with time or personalities. Secure property rights vastly improve economic productivity as evidenced by the recent declaration of Mauritius as the only High Income Country in Africa by the World Bank. Mauritius is the champion of offshore finance on the continent through priceless guarantees to property rights and rule of law.

In the end, there is a heavy economic cost to the recent assault on property rights through the recent pronouncements by the government. The cost is lack of economic development and investment (foreign or local). Local investors will actually feel safe to stash their investments in other countries while generating such proceeds from the local economy. Investors are not willing to commit their capital to the local economy in Public Private Partnerships (PPPs), Joint Ventures, Greenfield investments, buying struggling state entities or invest in other give away deals from Zimbabwe largely because of the government's tainted history of property rights violations. Therefore it is fair to point that the government overpromised potential investors with its open for business mantra and is now struggling to live with it.

Victor Bhoroma is a freelance economic analyst. He holds an MBA from the University of Zimbabwe (UZ). For feedback, mail on or follow him on Twitter @VictorBhoroma1.

Source - Victor Bhoroma
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