Post-Mugabe, Can Zimbabwe Rebuild?

With a shortage of capital and currency, bloated stock market and many other problems left by the prior administration, Zimbabwe's new leaders face an uphill battle.

After 37 years of autocratic rule under former President Robert Mugabe, Zimbabwe has been left broke, with its economy in a coma. Mugabe’s ouster last month, and the appointment of former vice president Emmerson Mnangagwa as his successor on November 24, offer hope for the country to rebuild its economy again. But it is a process that promises to be long, costly and difficult.

Zimbabwe faces a critical shortage of capital in the financial system, low industrial capacity utilization rates (15%-40% depending on the nature of the industry), a shortage of currency notes in the banking system and a bloated stock market. All these problems need urgent attention from the new government.

Any plan for reviving the economy must also address the challenge of power supply. Zimbabwe imports power from its neighbours to augment local generation. In the period leading to 2016, power consumers were sometimes without light for up to eight hours a day, five times a week. In the last two years, power outages have been reduced to about three hours, twice a week, says Ned Nedziwe, chairman of DEICOV Group, a local company engaged in  agriculture, property development, and tourism. But it’s not as much of an improvement as it may appear because, Nedziwe explains, demand for power has fallen because many companies have been forced to shut down. For industrial output to pick up, power supply must rise, he adds.

Needed: Foreign Capital

The yawning capital void will need significant foreign investment. To bring back global interest, the new president needs to overcome the country’s confidence deficit in the international community, especially among investors and the global financial institutions.  Mnangagwa has pleaded with international investors to return and asked countries to lift sanctions, which he said have crippled the once vibrant economy, on the day of his inauguration. “Confidence built on transparency, honesty of purpose will be very important,’’ says Dr. Akintola Owolabi, who teaches finance at the Lagos Business School, in Lagos, Nigeria’s commercial capital.

Zimbabwe needs to reach out to and convince foreign investors, both those who fled in the wake of harsh policies initiated by Mugabe and those who were  watching from afar as the economy sank. “We are asking foreign investors to give the new Zimbabwe a chance. The more FDI we have, the easier it will be to turn the ship around,’’ says Nedziwe. “Zimbabwe is open for business.” 

Hasnain Malik, head of Equity Research at London-based Exotix Capital, also sees foreign investors playing a key role in rebuilding. “The transition from Mugabe to Mnangagwa promises a shift to more engagement with foreign capital providers externally,” he says. “That could put Zimbabwe back on the foreign investor radar.’’

Inherited Baggage

Mnangagwa appointed a new cabinet on November 30. He retained some ministers from the previous Mugabe cabinet, who like him, are a part of the powerful ruling party, the Zimbabwe African National Union-Patriotic Front (ZANU-PF). The party, led by veterans of Zimbabwe’s war of independence, worked with the military to seal Mugabe’s fate. But many also played key roles in the Mugabe administration’s flawed laws and policies, including those on indigenization.

Passed into law in 2008, the indigenization law compelled mining and financial companies owned by white Zimbabweans and foreigners to transfer a minimum of 51% of their shares to black Zimbabweans. This initiative was intended to empower Zimbabwe’s black citizens, but it hastened capital flight from the country. It also saw the government seize farmlands and properties owned by white farmers to give to black citizens.

There are voices asking for change now, says Nedziwe. “Even his (Mnangagwa’s) own political colleagues are pushing for changes in the culture and asking for changes in some laws,’’ he notes. 

Malik of Exotix points out that response from investors will have a strong link with the way the government handles the indigenization policy. “A transparent application of indigenization, in other words much more clarity on rules of the game, is probably more important for bringing back FDI, from a very low base, than a full-blown repeal,” he said.

Economic Chaos

Zimbabwe’s descent into economic chaos has been by a combination of policy errors and personal ambition. Reportedly, it was 93-year-old Mugabe’s plan  to get his wife, Grace, to succeed him that precipitated the military action that removed him. The cheering crowds on the streets of Harare, with young people dancing with and hugging soldiers on armoured tanks during the putsch that ended Mugabe’s reign, showed the people’s disgust with him.

Zimbabweans have enough reasons to be angry. A report by the World Bank in April 2017 points out that the series of political and economic crises that engulfed the country for nine years from 2008 reduced its GDP by almost half and described it as the “sharpest contraction of its kind in a peacetime economy.’’

The report further notesd that this development pushed the poverty rate in the country above 72% and one-fifth of the population into extreme poverty. While the poverty rate fell between 2009 and 2014, it is now set to rise again. The economy grew by a mere 0.7% in 2016 owing to a severe drought. Fiscal deficit, in comparison, stood at 10% of GDP.

Financial System Breakdown

The financial system itself is facing a crisis as well. There is a shortage of cash notes in banks and long queues in front of ATMs. “Since people could not get their money out of the banks, many decided to bank under their pillows,” explains Nedziwe. He adds that this has effectively devalued the bond notes introduced by the Zimbabwe central bank, forcing Zimbabweans to move into the only two things which hold value: property and the stock exchange.

The flight into the stock market caused a bubble there, says Nedziwe. In the last six months, the market has nearly quadrupled in value, rising from about $4.5 billion to about $15 billion he said adding that with the advent of this new government, one is beginning to see corrections on the stock market.

“The priority is getting dollars back into the system to reduce bank ATM queues, enable payments and commerce to resume and facilitate repatriation of foreign portfolio capital,” says Malik. “That is likely a multi-billion dollar requirement.”

Malik believes further that the best approach would be to re-engage with the IMF and seek to achieve higher policy credibility on fiscal deficit reduction and foreign ownership rights. “The quicker policy credibility is established, the more foreign capital starts flowing,’’ he says, adding that it would be easier to launch a local currency once the economy has been re-booted and policy credibility re-established.

Meanwhile, President Mnanagagwa has asked Zimbabweans who took money out of the country to return it within three months—or face prosecution. Nedziwe believes his compatriots will heed the presidential call: “If people respond positively to this kind of initiative from the new president, we are going to rebuild the economy very, very quickly.’’