The World Bank and IMF both predict GDP growth above 5% for Zimbabwe in 2022, while both caution that decisive government action is needed for this to be attained.
A recent encouraging World Bank overview of Zimbabwe says the country’s economy showed signs of recovery in 2021 and its GDP is now expected to rebound to 5.1%.
Growth is expected to strengthen further as the negative impacts of COVID-19 subside, rain levels remain good, and implementation of policies outlined in the country’s National Development Strategy accelerates, it says.
The International Monetary Fund (IMF) echoed these sentiments in a recent article, saying that Zimbabwe’s economic activity showed signs of recovery in 2021, with real GDP expected to grow by about 6% in 2022.
This reflected a bumper agricultural output, increased mining and energy production, buoyant construction and manufacturing activity, and increased infrastructure investment.
However, it said, decisive actions are needed to lock in economic stabilization gains and accelerate reforms.
Giving an authoritative view from inside the country, Sternford Moyo, senior partner at Scanlen & Holderness, in Harare, says he believes the outlook for Zimbabwe’s economy is very positive.
Mining attractions abound
He says gold alone is expected to contribute about $4 billion to the economy this year – up by about 21% – because three mines that were previously dormant have come back into operation.
“This includes a huge mine that has been opened in Guruve in Mashonaland 150 kilometers north of Harare that had been dormant for some years.”
He says the platinum companies have also indicated that they are looking to expand production and ramp up output.
Platinum output is therefore expected to contribute $3 billion to the economy in 2022.
“I think mining will be central to the growth of our economy this year,” says Moyo.
He sees the main investment opportunities this year also coming from the mining sector, and this is already happening.
For example, Scanlen & Holderness is advising Zhejiang Huayou Cobalt, the Chinese listed cobalt company on Zimbabwe law matters relating to its acquisition of Prospect Resources-owned Arcadia Lithium Mine, some 40 kilometers outside of Harare, in December, for $422 million.
Zimbabwe has one of the world’s largest reserves of lithium, which is a sought-after commodity used in making batteries, energy storage, electric vehicles, portable devices and solar panels, among other things.
“Zimbabwe has more than 60 different minerals that are in demand throughout the world, including platinum, gold and lithium,” says Moyo.
He says mining and agriculture have always been central to the economy of Zimbabwe.
“We had an excellent agricultural season last year because of the good rains and the same thing will happen this year with good rains. And government is supporting farmers with good inputs.”
A complication with agriculture is the historical land expropriation without compensation, which resulted in farmland being owned by government and leased to farmers.
“But to get a 99 year lease takes a long time and, even when you have it, it can be terminated on six months notice at any time. And if you want to sell the lease, the buyer must be approved by government,” says Moyo.
Despite challenges such as this, Zimbabwe has set a target to reach a $12 billion mining economy by the year 2023, and the country continues to attract investors who believe the opportunities are worth the risks.
New stock exchange
To encourage foreign investment, Zimbabwe has recently introduced the Victoria Falls stock exchange, which is trading only in foreign currency.
This is in addition to the Zimbabwe Stock Exchange, which trades in local currency.
Those who list on the Victoria Falls exchange will be allowed to remit their dividends and retain their funds in foreign currency, including local investors who have access to foreign currency.
“In an environment where the local currency is depreciating so rapidly, this can provide a hedge against inflation,” says Moyo.
“This is a prelude to developing Victoria Falls into a financial services centre as a way to attract foreign investment and foreign currency.”
Local investors on the Victoria Falls exchange will be able to receive their proceeds in foreign currency or receive the equivalent at the time in the official local currency.
Risks and challenges
According to current government policy 40% of an exporter’s proceeds in foreign currency is converted to local currency at the official exchange rate.
“And there is a huge difference between the official exchange rate and the actual exchange rate on the open market,” says Moyo.
The official exchange rate is $1 to 108 Zimbabwean dollars (RTGS), the local currency.
Yet, on the streets, or ‘alternative market’ as it is officially known, it is $1 to 200 to 250 RTGS.
“But if you list on the Victoria Falls exchange, you are allowed to retain all of your export proceeds in foreign currency,” says Moyo.
The compulsory liquidation of foreign currency into local currency is a huge problem for most companies, he says.
“So, when clients are trying to find a way out of those difficulties we will advise them – with new projects – to either apply for a special economic zone licence where they are allowed to keep their accounts and receipts in foreign currency, or to list on the Victoria Falls exchange to achieve the same thing.”
Another issue is that if companies receive their revenues in foreign currency, they need to pay taxes in foreign currency.
“So, we have a situation where the government is in fact refusing its own currency, and this just undermines the local currency further,” says Moyo.
The cost of capital is another issue businesses have to deal with in Zimbabwe.
“If you are borrowing US dollars at 10% to 15%, that is very expensive money, and if you are borrowing in local currency you are paying up to 40% to 50%,” he says.
Then there are the power deficits, which are a huge source of discomfort for producers.
“Some, including the mining companies, are having to pay for it in foreign currency all the time to be assured of a dedicated line, and even they are suffering power cuts from time to time.”
Huge growth opportunities
Despite all its country risks, Zimbabwe is still attracting investments, because the growth opportunities are huge, says Moyo. “But we could be doing a lot better if we had a better risk profile.”
Some 90% of the world’s platinum comes from Zimbabwe and South Africa, and 50% of the world’s gold comes from Africa, so investors have no choice but to look at Africa, despite its problems, he adds.
“A good example is China, which needs raw materials to power its rapidly growing industrial and economic expansion. It needs coal and platinum and lithium, and it has no choice but to come to Africa for these.
“And at the moment China has a large stockpile of chrome, and that comes largely from Zimbabwe and South Africa,” he adds.
The bottom line of Zimbabwe’s issues that are of most concern to investors are its financial and tax laws and mining regulations, its demanding foreign currency and refusing its own currency, its high levels of royalties and taxes, the compulsory liquidation of export proceeds, and an official exchange rate that is far removed from the actual exchange rate.
“All these intricacies create a vast amount of advisory work for law firms like us,” says Moyo.
Scanlen & Holderness was set up more than 130 years ago in 1894 by Sir Thomas Scanlen, who was prime minister of the Cape Province in South Africa and came to Zimbabwe looking for minerals with Cecil John Rhodes.
“And the firm has been heavily involved in mining ever since,” says Moyo.
Looking to the future, for Zimbabwe to operate properly the government needs to free the economy and allow the exchange rate to be determined by the market. So there are a lot of reforms to be done, says Moyo.
“The government will soon realise that to achieve the targets it has set, it will have to allow a free economy to open.”
As the Africa Continental Free Trade Agreement (AfCFTA) comes fully into operation it will allow the free movement of goods and services and people and the competition between African countries is going to intensify.
“This means that Zimbabwe will have to reform its policies in order to attract investors.”
