AS a way to wow the audience with the purpose and underlying philosophy of the budget statement, the 2016 budget statement’s preamble ranks amongst one of the best I have seen in recent times.
When I saw the main theme of the 2016 national budget statement which reads “Building a Conducive Environment that Attracts Foreign Direct Investment”, I got excited. The theme suggested that the government was finally pushing for a new era where it would actively seek to create business friendly conditions that are conducive for attracting Foreign Direct Investment (FDI).
FDI is a cross-border corporate governance mechanism through which a company obtains productive assets (investing) in another country. There are different reasons why foreign investors would want to invest in other countries but generally, the additional investment is considered a huge benefit to the countries that receive it.
In order to attract FDI, developing countries have to make conditions attractive to FDI if they are to be a choice destination of investment. FDI inflows provide a strong impetus for economic development across countries. FDI serves as an important source of supply of funds for domestic investment thus, promoting capital formation and conditions for knowledge transfer into the host country.
The ability of developing countries (like Zimbabwe with low savings) to attract FDI is key to economic growth and achievement of poverty reduction strategies. Multinational Companies (MNCs) that invest abroad often have choices in terms of which country to invest in. As an example, if an investor wanted to build an IT company in southern Africa, they are likely to invest in a country that offers them the most favourable condition in the region.
After almost two decades of economic stagnation in Zimbabwe due to low investment, prolonged poor rankings in terms of investor sentiment, the main theme on Minister Chinamasa’s 2016 budget Statement’s (“Building a Conducive Environment that Attracts Foreign Direct Investment”) was bound toget me excited given that Zimbabwe has been ranked as one of the worst places for investment in recent times. Any positive action from the Ministry of Finance would be hugely welcome.
There are certain conditions that attract FDI. Examples of these conditions are perceived advantages of owning a business in a foreign country (as opposed to exporting to it), locational advantages such as resources, market size and lower costs of producing in the host country.Advertisement
The attractiveness of foreigners owning a business in Zimbabwe is currently overshadowed by lack of clarity on indigenisation laws. Although Zimbabwe is blessed with resources, it is considered a small market by international standards which means that most companies that invest in the resources sectors do so primarily for export.
Since dollarization, Zimbabwe is a high cost country especially when compared to other countries in the southern Africa region. Therefore, the expectation would be for the budget statement to address some of these issues and promote the creation of conditions that attract FDI. I read the statement with a view to finding policies on (1) clarification and softening of company ownership laws; (2) protection of property rights and private investments and (3) improvements on cost of doing business.
As one goes through the budget statement, it becomes apparent that there is a disconnection between the main theme (attracting FDI) and the contents of the statement itself. There is subtle mention of improving ‘ease and costs of doing business’ and clarification of indigenisation laws and the mentioning of these two areas give an initial illusion of positive implementation.
The little optimism gets dampened when one notices which sections of government had been tasked with progressing these two areas. My scepticism is based on the fact that the responsibility for improving the ‘ease of doing business’ was with the Office of the President and Cabinet instead of Industry and Commerce or Economic Planning.
The responsibility for clarifying indigenisation laws has been given to the Minister of Youth, Indigenisation and Economic Empowerment – the very minister whose utterances are considered to be chasing foreign investors (and therefore FDI) away. As if the 51% indigenisation law was not controversial enough, Minister Patrick Zhuwao wants to levy an extra 10% on companies. These are not the views that will improve investor sentiments.
It becomes apparent that there is not much in the 2016 budget statement that the government is planning to do to unlock foreign direct investment. Instead, there is a lot of coverage on plans to re-engage international lending organisations to ensure that the government opens credit lines.
It also becomes apparent that what the government is actually planning to do in 2016 has little to do with unlocking FDI. The government intends to unlock its ability to borrow more. Given their record, it is unlikely that the government intends to borrow to invest, they intend to borrow to fund recurrent expenditure that includes a blotted army, thousands of ghost workers etc.
Instead of unlocking FDI, the state intends to unlock its borrowing capacity – more debt for the likes of you and me and our children. In other words, it is described as Foreign Direct Investment but it smells like government foreign borrowing.
My concerns increased when I checked how much the government was expecting in FDI and Diaspora remittances in 2016. If the minister was really genuine about attracting FDI, one would have expected to see a forecast increase in amounts of incoming FDI. Chart 1 and chart 2 show the amount the minister is expecting and FDI growth since 2009
Chart 1: Inwards FDI US$
While the FDI numbers for 2016 show a small increase the graph below shows FDI growth rate since 2009. The figures (Chart 2 below) for 2016 show slowing growth compared to previous periods.
I also looked at the movement in Diaspora remittances as shown in chart 4 below.
Chart 3: Inward Diaspora Remittances
Again it shows very small growth highlighted in the Diaspora remittances growth rate chart 4 below.
Any leader who actively pursues a policy would expect some sort of measurable improvement. It is suspicious that the minister who is planning to unlock FDI expects declining growth in that FDI. The budget statement shows that instead of unlocking FDI, not only does the government want FDI to remain locked, they have actually thrown the keys away. One can only conclude that the Minister knows what needs to be done but also understands that he cannot do it – his hands are tied!
David Mutori is a former chief operating officer of a group of luxury safari camps (based in Zimbabwe, Botswana and Zambia) and Zambezi river white water rafting guide. He writes in his own capacity on topical structural issues that affect the development of Zimbabwe. He can be contacted by email on firstname.lastname@example.org or Twitter on @DavidMutori