ZIMBABWE: ECONOMIC RECOVERY NEW REALITIES & NEW PARADIGMS

ZIMBABWE: ECONOMIC RECOVERY NEW REALITIES & NEW PARADIGMS

By Laurence I. Sithole, B.Com (Hons) Banking & Investment Management, National University of Science & Technology Zimbabwe

Harare, Zimbabwe

21.09.2020

Introduction

Modern and contemporary Zimbabwe as we know it was built on the back of agriculture, mining and other related primary extractive industries so much so that at independence in 1980 the country had one of the most advanced industrial economies in Africa second only to South Africa. The economic growth and progress brought on by these primary sectors with time naturally cascaded to the rest of the economy resulting in emergence of various industries. The industrial capability of the country according to Herbst and Mills (2010) in the 1960s was such that Zimbabwe exported electronics to the United States. At the time of independence, the Zimbabwe Dollar was then stronger than the US Dollar (from 1978 to 1980 one United States Dollar would have bought you ZW 68c) and ranked at par with the pound Sterling.

This was a very strong position no doubt to be in as a country at the most critical and defining juncture of the nation's history and instead of developing on this platform to reach greater heights of prosperity and economic progress the nation retrogressed to the point where the advantage gained at independence from policies adopted and implemented prior reduced to almost zero resulting in a nation that is a pariah at best and a basket case at worst.

The reasons for the current position are both economic and political. The intent of this article is to explore the economic side of the country's decline with the view to put forward new areas of economic significance that can give rise to the recovery of the country's fortunes. These new areas if adopted and implemented will most certainly result in economic green shoots and with time they will transform into the major industries anchoring the economy on the same scale and extent that mining and agriculture did in the former years.

The political side of the equation of Zimbabwe's economic decline has been written about extensively and it is beyond the scope of this article. However, it must be noted and born in mind that it is immensely difficult to separate the politics from the economics as these two concepts enjoy a very strong symbiotic relationship.

Why agriculture and mining will not be the anchors of the new economy;

It is the firm view of the author that while agriculture and mining industries remain central to the economy they will not lead the country into economy recovery and spur it into the middle-income status envisaged by 2030. This view is as radical as it is unconventional and, in many audiences, may even be dismissed with contempt. However, when one considers the critical success factors necessary for thriving mining and agricultural industries the radical and unconventional ideas postulated by the author do not seem so far fetched.

Agriculture cannot lead Zimbabwe into the promised land of economic prosperity in its present state simply because the most important resource needed to sustain activities in this sector, land, does not have a market value and as a result cannot be considered a factor of production. This phenomenon has been a legacy of the fast-tracked land reform program implemented in 2000.

The issue of land reform which was made necessary by the need to redress previously disadvantaged black people by allocating them land expropriated from former commercial farmers had the unintended consequence of severely compromising security of tenure of the land acquired by the state. This has been so adverse that financial institutions will not generally lend against such land. This absence of or lack of credit for agricultural purposes has meant that farming activity is heavily subdued in comparison to when the originally titled owners of the land engaged in farming activities.

To further reinforce this notion Masiyandima et al. (2011) assert that: “Before 2000, access to credit was relatively easy for the commercial farmers whose land ownership rights were clearly defined in the Land Apportionment Act of 1930 compared to the small scale communal agricultural sector with communal land ownership vested in the state. Land productivity was, therefore, generally higher in the large-scale commercial farms compared to the small scale, resettlement and rural sectors. The large-scale commercial farmers, for example, produced about 85% of the total agriculture output in value terms, while the communal small scale, rural and resettled farmers produced 15%.”

Furthermore Masiyandima et al. (2011) go on to argue that the higher yields and productivity in formerly white owned commercial farms was not only a factor of the availability of funding and credit to the farmer but were also a factor the expertise of the farmer and technology deployed as well as crop varieties. They also spell out the various funding mechanisms that were available to the agricultural sector up to the period characterised by the Fast Track Land Reform Program (FTLRP) which were by and large highly comprehensive and substantial ranging from budgetary allocations from Government, agricultural procurement bodies such as the Grain Marketing Board, Cold Storage Commission, Cotton Company of Zimbabwe through input schemes, commercial banks, the Agriculture Finance Corporation (which in itself used to be funded predominantly by the EU and the World Bank). Private sector companies like the main seed producing companies and tobacco merchants also added to the stock of credit funding available to farmers.

However, there was an acute dip in the availability and extension of credit to the agriculture sector during the period 2000-2008. As can be expected and almost naturally, productivity followed the trend of availability of financing in that sector. The greatest and most dramatic fall in agricultural lending occurred in the years 2000-2001. According to the RBZ Monetary Policy Statement of 2008 in 1998 over 90% of commercial bank credit was comprised of lending to the agriculture sector. By 2001 however, lending to this sector had fallen to less than 20%. This made Government intervention necessary through various initiatives such as the infamous Agriculture Sector Productive Enhancement Facility (ASPEF).

Another arguably unintended consequence of the land reform program is that almost 50% of the population has become food insecure and that the country has gone from being a next exporter of food and agricultural products to a net importer. Although it would not be entirely accurate to attribute the country’s weak food security status to FTLRP it, played the biggest role. USAID posits that: “Zimbabwe’s economy and food security situation remains fragile. Poor weather conditions, including erratic rainfall and long dry spells, contributed to increased humanitarian needs across the country, while the deteriorating economic situation exacerbated the already rising vulnerability in both rural and urban communities. Zimbabwe experienced a drought in the 2018/2019 agricultural season, resulting in large-scale crop failure. The 2019 Zimbabwe Vulnerability Assessment Committee projects an estimated 5.5 million rural Zimbabweans to be food insecure during the peak of the 2019/20 lean season, with 3.8 million people in need of food assistance. Urban vulnerability is also on the rise, with the Ministry of Public Service, Labour and Social Welfare estimating that up to 2.2 million people in urban areas are food insecure.”

The present administration has made some strides to restore the agriculture sector including an agreement to compensate former farmers for the improvements made on the land where their farms where situated. The effect of this policy remains to be seen as many of the farmers who left the country two decades ago have safely settled in neighbouring countries chief among them Zambia where they are once again thriving. Readers might find it somewhat of a cruel and amusing irony that the late former President Robert Gabriel Mugabe is honorary minister of lands and agriculture of Zambia, Herbst & Mills (2010). It will take some convincing for them to leave secure operations they have set up to restart enterprises in this country riddled with uncertainties. It is the considered view of the author that such a development is unlikely. With that said agriculture with all its promise and potential will not be the avenue to economic recovery at least not in the state it is in now.

What about mining?

A mine has been defined humorously as a hole in the ground with a fool at the bottom and a crook at the top. The author remains curious about why such a venerable industry is described in this manner, but the mining industry was and remains one of the biggest income earners for several countries on the planet, think of South Africa, Brazil Russia, Canada, Botswana, Ghana, DRC and Australia among others. If there is to be an economic saviour for the nation of Zimbabwe it would have to be mining right? Not quite. A closer glance at how Zimbabwe fares in comparison with other major mining countries in the world reveals why. A historical perspective is in order here as the country missed the great commodities boom of 2000 to 2008 fuelled by the mass urbanisation of countries like China which demanded vast quantities of basic materials. This was a boon that the country wonderfully missed. Not for want of mineral resources did the country miss the super cycle of unprecedented growth in commodity prices. Zimbabwe is endowed with just about any and every mineral one can think of. You are only limited by your mind in imagining the extent of the resources, gold, diamonds (for a long time the only country in the world with alluvial diamond deposits), coal, platinum (the second largest platinum deposits in the world after SA are in Zimbabwe). The country should be awash with cash from having monetized its mineral resources and activities in that area, but it hasn't because its environment isn't conducive to its growth and development. Notwithstanding the foregoing it may come as a shock to many that in global terms Zimbabwe is not considered a resource rich economy but possessing these minerals, in a perfect world should generate export earnings in the region of US$ 2 billion over the medium term and US$ 5 billion over the next 15 years, Hawkins (2009).

The Zimbabwe Chamber of Mines (2016) published data captured in the figure below displaying the various minerals extracted in the country as well as their contribution and importance to the economy:

Figure 1. Source: Zimbabwe Chamber of Mines 2016

As indicated in the figure, Gold (45 per cent) production has the highest share value, meaning it is the most valued mineral in the country. It is followed by platinum (26 per cent), palladium (12 per cent), nickel (7 per cent), coal (5 per cent) and other (5 per cent) mineral resources in the country. It is not difficult to see the great potential the sector has in terms of economic revival especially since this picture does not sufficiently capture the potential that other mineral resources like diamonds, gas and other minerals can play once they are sufficiently developed.

Despite this great and untapped potential, statistics and research show that the sector has continued to decline in terms of significance and contribution to GDP, “several losses have been exhibited in the mining sector which has culminated in a stagnant economic growth in the country. During its peak in 1986, the mining sector contributed 6 per cent to Zimbabwe’s GDP (Matsika, 2010). However, from the period 1998 to 2009, mining did not play a significant role in the development of the country’s economy due to the financial and operational costs and constraints because of the hyper-inflationary environment experienced in the country during this decade”. Matsika (2010) is not the only person to note this decline in output in the mining sector the Ministry of Finance, RBZ and Zimstat have also noted this trend and captured it in a study they conducted and published. Figure 2 shows the trend of mining output growth rate from 2009 to 2016:

Figure 2: Source Ministry of Finance, RBZ & Zimstat 2017

The importance of the mining sector is far reaching. It goes beyond simply paying taxes to the development of infrastructure. Cities, towns and other major settlements have been built around mines. Segula (2013) postulates that; “Mining companies have been able to build dams, bridges, roads and there has been provision of clean water, power and communication. Mines have been able to establish schools and hospitals.” Furthermore, it is important to note that major mining companies like Zimbabwe Platinum Mines (Zimplats) have built more than 10,000 housing units for their staff together with other additional infrastructure like roads, electricity and water. It is not farfetched to theorise with these facts in mind that when the mining sector declines infrastructure also follows suit.

Other contributions made by the mining sector beyond Government revenue through collection of taxes and royalties includes foreign currency generation through exports. Historically in 2012 the sector contributed 57% of exports which declined to 50% by 2015 because of the fall in commodity prices generally, Dube (2016). This contribution to exports is especially critical because the country has been in throes of a biting foreign currency shortage from about the same time, 2015 to date. To further enhance our perspective in terms of appreciating the importance of this sector one needs to consider the fiscal collections made by Government from this sector as well as the potential for growth observed by multilateral financial institutions like the World Bank. The Zimbabwe Independent, a leading business weekly reported in 2014 that the mining sector had the potential to generate as much as US$ 450 million in taxes for Government. The World Bank cited in the same business weekly contended that the mining sector operating optimally had the potential to generate as much as US$ 11 billion. This quantum of money can easily expunge the amount the country has in terms external debt.

Why has Mining Failed to Take Off?

Malinga (2017) asserts that: “The mining industry in Zimbabwe is marred by various challenges and this study identified the following ones: the resource curse discourse; economic stagnation, political uncertainty and the politicisation of minerals, operational challenges, lack of transparency and accountability in the collection of mining revenue and investor policies.” It is the considered view of the author that the mining sector cannot re-emerge and go on to thrive in a manner resulting in an economic turnaround for the nation if the challenges mentioned go unresolved.

The Resource Curse Discourse

It is commonplace in Zimbabwe to visit so called resource endowed areas of the country whose poverty on the surface of the ground is a stark contrast to the rich resource below the surface. This phenomenon is not exclusive to Zimbabwe alone. It is a common trend in many African countries. This is typical of what is known as the resource curse. “Resource Curse theorists maintain that whereas many countries have grown and diversified on the strength of rich natural resource endowments (Finland, Indonesia, Malaysia and Norway), recent (post-1970) history shows that many mineral-rich developing countries have consistently underperformed their mineral-poor peers in respect of growth performance, income equality and governance. (Toto Same, 2008). Resource Curse theory maintains that export-driven natural resource sectors – oil, gas, minerals, precious metals and gemstones – generate substantial revenues both for the state and foreign-owned multinational businesses, yet these do not translate into broad based economic development benefiting all sectors of the population and especially the poor.”

Zimbabwean people have experienced this with the discovery of alluvial diamond deposits in Chiadzwa in the eastern highlands of the country. Despite the extent of the resource and the quality of the gems Government notoriously stated on many occasions that it had collected far less in revenues than what was due to it from the mining activities carried out there. Corruption, greed, lack of transparency and accountability have taken precedence. Mineral wealth benefits the hands of a few, especially the elite and people who have powerful connections both locally and internationally. The wider society has not benefitted from the minerals found in the country as they continue to languish in poverty and unemployment as described by Malinga (2017).

The main explanation of this paradox according to Hawkins (2009) “is the failure and or inability of governments to mobilize non-renewable natural resource revenues and reinvest them efficiently in physical and human capital, diversification of the economy and poverty reduction.”

Lack of investment and exploration activities

The Zimbabwe Geology Survey of 1990 identified no less than 500 individual deposits of base metals and industrial minerals in Zimbabwe. The survey also cites Zimbabwe as an important producer of gold, chrome, lithium, asbestos as well as high quality emeralds. The Survey also gives an extensive review of the mining industry in the country and its development however, Hawkins (2009) notes that all mines operate under constraints namely unfavourable exchange rates which decimated at that time the production of gold, shortage of power, skills and ore. The net effect of these constraints is that there is subdued production in minerals which is concentrated in a few commodities.

In addition to this, “…Geological assessments suggest that underinvestment in exploration and production, and not mineral potential, have been the main factors limiting mining development in Zimbabwe. This is not a new phenomenon and pre-dates the onset of the political and economic crisis at the end of the 1990s. As long ago as 1992, the World Bank identified Zimbabwe, along with the DRC and Namibia, as ‘Category A’ countries requiring the highest level of exploration investment amongst African states of US$100 million over a five-year period ($20 million annually). In all three countries mining exploration had been constrained by political and economic uncertainty with mining houses reluctant to invest in a country with a track record of policy unpredictability, especially in terms of property rights and exchange-rate management.”

This observation by Hawkins (2009) highlights some very critical fundamentals chief among them being that there cannot be a thriving mining sector in any country without exploration activities and meaningful investment. It just will not happen. If the political environment remains caustic to foreign capital and economic uncertainty prevails as well as policy unpredictability remain the mining sector will therefore not develop and realize its potential as a possible economic mainstay for the country of Zimbabwe.

How about industry?

There is no economy in the world that has ever grown and advanced without industrialization. The manufacturing sector of an economy must grow in significance for economic growth to occur. The virtues of industrialization are widespread. Zimbabwe cannot fully appropriate the full value of its resources because the country produces raw and basic materials with little value addition. Everything that we produce as a nation is sold on to the export or global markets in its raw form with little or no value addition.

Gold is dug out of the belly of earth and sold on raw, it is not even refined here. Our diamonds are also dug out of the earth but are not cut or polished in our country simply because there are no such facilities in our country. Tobacco is produced here, and our variety is one of the very best in the world and yet it is sold to the world markets unprocessed beyond curing. The point to be made here is that there is a large amount of unrealized value simply because our country does not have the capability to firstly add value to our raw products and secondly to add value in a manner that leaves the same products competitive on world markets.

The reason for that is very simple: there has not been any meaningful investment in capital formation in this sector of the economy as compared to the nations that we trade with. The net effect of this has been that our goods produced locally will tend to be more expensive than those produced in other countries.

It is not unusual to go the Bulawayo industrial sites and see machines that were acquired in the 1940s. It is not difficult to fathom how our industrial capability stacks up to our neighbouring countries which enjoy regular investment into their industries. Industrial competitiveness for Zimbabwe now is a pipe dream. It requires certain conditions to be precedent and these conditions for the most part remain either illusory or non-existent.

The Road Ahead

To get our country back on track we need to look carefully at where the world is going. We are in the middle of the third industrial revolution driven by technology and services. These two comprise what is now known as the knowledge economy and represent a clear departure from the significance of the primary/extractive and secondary industries. Technology and services are where the greatest value can be appropriated, and it is in technology and services where the key to exponential growth in productivity lies. The most magnificent thing about technology and services is that it pervades every sector of the economy and we have seen it converge with just about every area of the economy in recent times. The concept of the internet of things is a case in point.

The most obvious sector that can lead an economic turnaround because it has successfully converged technology, knowledge and services is the financial sector. The critical question to ask is why Zimbabwe cannot become like Switzerland, Panama, Bahamas, Cayman Islands, Isle of Man, Shanghai, Guernsey, Dubai and even Botswana all of which are countries known for being world financial centres? The world has changed, the world is changing, and the world will continue to change. There are countries in the world like India which have experienced and continue to experience rapid economic growth and as such demand international financial services.

According to Z/Yen Long Finance (2019), “India is one of the fastest growing economies in the world and a large user of the International Financial Services. As India seeks to expand its economic and strategic activities globally, a dedicated international financial services centre (IFSC) will provide a platform to undertake these services efficiently. India’s services exports were approximately US$ 195bn and imports were approximately US$ 117bn in 2017-18. In April 2015 the Government of India took the initiative to develop an International Financial Services Centre at Gujarat International Finance Tec-City (GIFT City) a Special Economic Zone to help India realise its potential in the international financial services industry. GIFT City IFSC provides a strategic location to develop an efficient platform for all inbound and outbound foreign currency transactions.”

This is not the only rapidly growing economy that makes widespread use of such services and is a potential boon for an economy hard pressed for investment and foreign capital flows like Zimbabwe. How is it that the country despite this great opportunity fails to take advantage and capitalise?

The infrastructure is already there, and the country already has a financial system that is reasonably well developed. Additionally, there are very strong merits that make the case of the country becoming a world financial centre more and more compelling. They include but are not limited to: economic benefits among others.

Again, a study conducted by Z/Yen in 2019 found that there are great economic benefits that accrue to a country that seeks to become a world financial centre, “perhaps the most obvious and most mentioned of benefit of hosting a successful financial centre. The top four centres in the Global Financial Centres Index, New York, London, Hong Kong and Singapore are all great examples of generating significant revenue through financial services. The square mile of the City of London is reckoned to contribute $50 billion to the UK economy and also helps the finance industry in many other locations around the UK.”

This amount that the study cites, US$50 billion was contributed to the national economy in a single year 2017. To put that in perspective in terms of the country of Zimbabwe, the financial services sector of the United Kingdom contributes to the national economy a quantum that is two and a half times the size of Zimbabwe’s economy if the figures on Zimbabwe’s gross domestic product provided by the World Bank are considered. With this perspective in mind this benefit alone should cause the gate keepers of the country of Zimbabwe to give careful thought to the advancement of the financial sector as it can lead the way back to economic wellbeing.

The other benefits that can accrue to a country that adopts policies aimed at fostering growth in its financial sector according to the study are international networking where international financial centres hosting foreign firms generate information flows and networks that help the wider economy.

The financial services industry often generates the talent and investment needed for innovation. Access to external currency markets; financial centres encourage trading of financial assets. These assets include domestic and foreign currencies. Strong international financial centres create and strengthen access to international currency markets and lastly greater external influence; where a stronger economy, with greater international networking, and an enhanced reputation for innovation, gives a centre and its host nation, greater influence and bargaining power in international relations. It is important to note that Panama has advanced and made such great strides in this area that the country does not have a central bank in the strictest sense of the term. They do have a financial authority that regulates the conduct and activities of the financial sector however, they do not have an institution that issues currency and acts as a lender of last resort to the banks. All banks and financial institutions requiring credit obtain it from the financial markets.

All of these benefits acting in concert and unison will have the impact of causing the country to re-emerge economically and even become influential on the world stage. However, in considering this new paradigm in terms of economic recovery and growth two things must be noted the first being that the financial sector is not the only service area that we can pursue as a nation. There is indeed a broad spectrum of service areas that can lead the nation out of where it is presently. For instance, a critical question to ask why cannot Zimbabwe develop a technology sector along the lines of Silicon Valley?

The Guardian in April 2019 ran an article titled “If Silicon Valley Were A Country It Would Be Among the Richest on Earth” showing the immense contribution the tech sector is making to the broader US economy. The output of Silicon Valley at US$ 275 billion according the Federal Bureau of Economic Analysis is 13 times bigger than the Zimbabwean economy and has a GDP per capita of US$ 128,308.00. It is purely astounding that a mere sector of the economy produces more than some nations of the world. Silicon Valley truly bears testament to the value that can be appropriated when a country intentionally harnesses the resources, human and intellectual capital it has at its disposal.

The point the author is making here is that financial services are not the only service that has the potential to be a leading economic growth driver. Technology is another and the list goes on. The second thing to consider in terms of services developing as a growth driver is the context of the service area. Financial services are a notoriously delicate area in Zimbabwe. This sector has been plagued by crises. These crises have been characterized by bank failures which have all had the effect of undermining confidence in the sector and the respective institutions.

Hyperinflation in two different eras has completely decimated domestic savings for corporates and households. When there are no domestic savings there can be little in the form of investment in capital formation which is a critical prerequisite for economic growth and prosperity. Another unfortunate phenomenon around the financial sector in Zimbabwe is policy inconsistency which contributes to undermining further the confidence that is already at an all-time low. It is well known that capital is shy and only flows to places with high levels of relative certainty. Where ever the ground shifts too easily and the rules are not clear the resultant effect will be capital flight.

Before Zimbabwe can turn in this direction the context needs to be needs to be not only right and certain, but it must be conducive to a vibrant and global financial sector. The basics need to be right. There can be no room for uncertainty or shifting goal posts especially in a highly globalised world. The first step in setting the right context will be to benchmark the nation as a country with those countries that have successful and vibrant financial services industries and emulating the steps that they took in getting to that state. Botswana an example cited earlier in this paper will soon be an emerging economy if it has not become one already. It is interesting to note particularly that Botswana has no exchange controls in the most literal sense. Is it no surprise that the capital into that country is highly mobile by-passing Zimbabwe in the process? Botswana’s regulations are clear, enforceable and certain. It is also interesting to note that Botswana has not had any bank failures whatsoever.

REFERENCES

1.     Reserve Bank of Zimbabwe (2009); Monetary Policy Statement;

2.     Hawkins T. (2009); The Mining Sector in Zimbabwe & Its Potential Contribution to Recovery,United Nations Development Program, Comprehensive Economic Recovery In Zimbabwe, Working Paper Series;

3.     Malinga W. (2018); From an Agro-Based to a Mineral Resources- Dependent Economy: A Critical Review of the Contribution of Mineral Resources to the Economic Development of Zimbabwe, Forum for Development Studies;

4.     Segula S. (2013); Contribution of the Mining Sector to Sustainable Economic Development of the Zimbabwean Economy; www.iac.co.zw/syllabus/ChamberofMines.pdf (accessed 1 March 2017).

5.     Matsika B. (2010); Mining and Minerals Special Focus: Mining Zimbabwe; www.howwemadeitinafrica.com/a-closer-look-at-zimbabwes-mining-sector/ (accessed 27 February 2017);

6.     Saunders R. (2008); Crisis, Capital, Compromise: Mining and Empowerment in Zimbabwe, African Sociological Review 12, 1, 2008, pp.67-89;

7.     Masiyandima N, Chigumira G, Bara A (2011). Sustainable financing options for agriculture in Zimbabwe (ZWPS 02/10, Issue March);

8.     Z/Yen Partners (2019); Financial Centres Likey To Become More Significant, China Development Institute;

9.     Mills G. & Herbst J. (2010); Africa’s Third Liberation, The New Search For Prosperity & Jobs, Penguin Books;