Context and background

On 1 December 2015, Deloitte held a seminar in Harare and I was asked to reflect on the likely economic impact of the 2016 budget presented by the Minister of Finance, Hon. Patrick Chinamasa, on 26 November 2015.  I chose to explore what evidence the budget had presented to suggest that the budget’s theme, “Building a Conducive Environment that Attracts Foreign Direct Investment”, could be realized.

In terms of the macro-economic context presented in the budget statement, GDP growth for 2016 was revised upwards from 1.5% to 2.7%; which is low compared with the projected average annual growth rate of 7% contained in Zim-Asset.  Thus, rather than the GDP doubling after 10 years as per Zim-Asset projected growth rates, it will need over 20 years with this new growth rate.  The proposed budget of $4 billion allocates 92% to recurrent expenditures; with 80% going to employment costs.  The projected savings of $170 million from civil service rationalization are less than 5% of budget.  Although financial stabilization efforts will be continued, the above economic performance numbers suggest that most impact on the attraction ofFDIs will depend on the impact of structural reforms discussed below.

While the Zimbabwe Government continues to produce well-written policy documents, there is always the two-legged elephant in the budget and other policy statements characterized by:-

(a) Politics (both national and international) that continues to hold economic reforms hostage, and

(b) A consistent gap between policy statements and implementation and which is still in the 2016 budget (without targets and timelines except Multi-lateral Debt Clearance by April 2016). 

It is this two-legged elephant that produces an Optimist-Pessimist dilemma: “I believe it when the Minister of Finance states what he intends to do, but I have difficulty believing he will get it done”.

Conditions Precedent for Foreigh Direct Investments (FDI): Investors, whether local or foreign require security for their investments; and these concerns revolve around the issues of (a) property rights associated with land and various investments; (b) clarity and enforcement of laws and regulations, and (c) space and opportunities for private sector growth.

Past concerns for investors in Zimbabwe have revolved around four issues of:-

1.     Continuing “agrarian revolution” fifteen years after it began in 2000 – an unusually long time as far as other revolutions go.

2.     Threat of losing 51% of investments for foreigners to local population on account of their nationality and not work.

3.     Seeming selective application and enforcement of laws and regulations.

4.     A crowding out of private sector on account of unsustainable debt and Government wage/employment costs.

How the budget addressed these issues is important in assessing the potential to attract FDIs.

Debt and arrears clearance

The budget is optimistic about attracting FDIs once its current arrears to the international community have been cleared on the basis of a Strategy presented to creditors during the October 2015 Annual Meetings of the World Bank and the International Monetary Fund (IMF) in in Lima, Peru.  The arrears clearance strategy discussed and supported by the international community in Lima is “premised on a non-HIPC debt resolution strategy, and supported by a credible economic reform agenda to ensure debt sustainability, unleashing economic transformation and poverty eradication” (paragraph 38, page 13 in the 2016 Budget Statement).

In the strategy, Government plans to mobilize bridge loan and long-term loan facilities from regional and international banks to clear debts to the World Bank and the African Development Bank, while IMF arrears will be cleared using Zimbabwe’s SDRs balance held by the IMF.  The clearnace of multi-lateral debts will be followed by engagement with the Paris Club members; but details of terms and conditions are yet to be clarified. 

Secondly, Government expects to meet its economic targets as set out in a Staff Monitored Program (SMP) approved by IMF Management. 

Thirdaly, Government expects to prepare a new Comprehensive Country Financing Program CCFP) – with the process for its preparation yet to be outlined.  This CCFP will be a medium-term reform program crafted in time for debt and arrears clearnace.  This program will be approved by the IMF Board rather than management, and it is not clear if politics will at that time rear its head.

Critical policy issues of agriculture, land, and indigenization

The country faces the threat of El Nino, and shortages of food associated with droughts. 

There are proposals to increase Government control of cotton industry, and to establish a Horticultural Development Board to improve performance of the industry.  It is not clear how this is expected to work given the poor performance of the 80-odd State Owned Enterprises that have been a constant drain on the fiscus.

An objective reading of the budget statement assumes that the proposed reforms will come with:-

(a) A Bankable and Tradable lease for Banks to lend farmers the $1 billion said to be available to support agriculture.

(b) A proper targeting in place distribute the $28 million allocated to agricultural inputs for 300,000 vulnerable households

(c)  A closing of the gap between maize prices from GMB and regional sources will put a check arbitrage and restore viable local maize production.  It is difficult to see why a farmer would continue producing maize after deliver it to the GMB for $395 per ton and then waiting to be paid for over a year.

The budget introduces a Land Rental Levy of $5 per hectare per year for A2 farmers, but it is not clear what is the incentive for farmers to pay the levy as long as they are not in possession tradable leases.  The penalty for non-payment is cancellation of offer letters – which in themselves are a source of uncertainty for many farmers.

The budget promises that Statutory Instrument on implementation of indigenization policies will be implemented; but it not clear if this will be sufficient to reassure investors as long as the law is not amended to clarify that 51% only applies to natural resource exploitation.

In view of past gap between plans and implementation, will investors feel reassured by these very positive promises, or will they take a wait and see attitude until there are positive implementation results?