Zimbabwe held its first ever election not featuring Robert Mugabe this week.
The keenly contested election saw incumbent Emmerson Mnangagwa secure a narrow victory over his closest challenger Nelson Chamisa from the Movement for Democratic Change (MDC) alliance. Although the majority of the election was peaceful, delays in announcing the result led to opposition supporters in the capital Harare protesting against the Zimbabwe Electoral Commision. The protests turned deadly as the army fired indiscriminately, killing six people.
The election came at a pivotal moment for the Southern African nation, following over two decades of economic turmoil. At the nadir of the crisis in 2008, the economy shrank by 18%, hyperinflation reached 500bn per cent, and unemployment was at 95% by some estimates. The economy has stabilized somewhat since the downturn with inflation running at more than 14% and the budget deficit at 12% of GDP. Economic growth is projected to reach 3.0% in 2018 on account of a good performance in agriculture and mining sectors. However, the economy still faces deep systemic issues including cash shortages, caused by a lack of foreign currency circulating in the economy.
Zimbabweans hope that the international financial community will re-engage with the country and bring an end to the economic stagnation that has blighted the country. The business community, in particular, has high expectations that the incoming president will prioritise tackling the liquidity problems in the country, according to Sifelani Jabangwe, president of the Confederation of Zimbabwe Industries (CZI).
“The key challenge for Zimbabwean businesses is access to finance,” he says. “Since the period of hyperinflation, most of our companies experienced capital erosion, and we were unable to access any other investment to upgrade plants and machinery. This caused a significant slump in the manufacturing sector, with many companies struggling to survive by revising their business models and others simply going out of business.”
“So there is a need for financing to help revive the manufacturing sector, either through bank loans or investment,” Jabangwe, who is also the general manager of the industrial equipment manufacturing firm James North Zimbabwe, added.
Since the Zimbabwean dollar was scrapped in 2008, the country has been using a basket of other currencies, with the US dollar as the most utilised currency. The use of the US dollar as the currency of choice has led to severe cash shortages, with many firms having to purchase US dollars at 15% or above the market rate. This, together with the devaluation of other regional currencies, has made many Zimbabwean firms uncompetitive in terms of exports especially when the dollar strengthens.
In this difficult environment, Zimbabwean businesses have had to adapt their operations, including focusing on regional exports as local demand waned. The manufacturing sector is projected to grow at 1.4% in 2018 mainly driven by food processing firms making the most of the bumper good agricultural season to source local raw products. However, smuggling of goods such as clothes and footwear continue to harm firms that focus on those finished goods for domestic consumption, despite government attempts to implement import controls.
When the economy slumped, unemployment surged leading to many Zimbabweans to enter the informal sector, including imported foodstuffs, clothes and footwear. Indigenous manufacturers have long complained that the importation of products – mainly from South Africa and Botswana – was suppressing domestic demand for locally made products.
To counter the issue, the government of the Mugabe legislation called the 2016 Statutory Instrument 64 (SI 64). The law called for “traders to obtain an import permit from government before importing basic commodities”. While many in the informal economy who sold imported goods complained that the law was destroying their only livelihood, the formal business community has welcomed the legislation as the only way to revive the domestic industry, according to Jabangwe.
“The SI has significantly helped bolster local manufacturers,” he says. “People see the instrument as a protectionist measure, but they forget that in 2015 Zimbabwean industries was on its knees because of the chronic systemic issues affecting the economy. So when SI 64 was implemented we saw a recovery of the manufacturing sector, especially the foodstuff sector.” The success of the law and the pro-business reforms implemented by President Mnangagwa has boosted sentiment within the local business community. This positivity has spread to some foreign investors who are willing to take a risk on the country.
Return of FDI?
Investor sentiment has improved since the ousting of Mugabe in November last year, as Mnangagwa has moved to reassure investors that the country is open for business. One of the first steps taken by the new leader was to scrap the unpopular indigenisation laws that forced foreign firms to cede 51% stakes to locals.
China, which had been reluctant to invest in Zimbabwe in areas outside of mining due to government policy instability and corruption, has pledged to invest at least $2bn in the country.
However, the panacea for Mnangagwa is restoring relations with the West, which have suffered since the chaotic land reform programme in 2008 where more than 4000 white farmers were dispossessed of land. Re-engagement with the EU and US is reliant on Western observers confirming that the elections are free and fair. Much is riding on the international communities report on the legitimacy of the elections.