Improving Zimbabwe’s Business Climate

The EU Ambassador to Zimbabwe, Aldo Dell’Ariccia recently told a Common Market for Eastern and Southern Africa (COMESA) conference on Improving the Business Climate in Zimbabwe that an Interim Economic Partnership Agreement (IEPA) with the EU will come into effect this week. This will facilitate duty-free trade between Zimbabwe and the EU. A full Economic Partnership Agreement is being negotiated through an Eastern and Southern Africa grouping. Trade figures between the EU and Zimbabwe have doubled since 2009. In 2011 the value of this trade was US$ 870 million with a positive trade balance in Zimbabwe’s favour of US$ 276 million.

Other speakers at the conference included COMESA’s Director for Investment Promotion and Private Sector Development, Mr Thierry Mutombo Kalonje, who emphasised that Zimbabwe must create a conducive business environment to attract more foreign investment into both the country and into the regional trade group. He seems to have implied that continued poor international perceptions of Zimbabwe as an investment destination are affecting investment into its neighbours as well as itself. Mr Kalonje said that Zimbabwe has shown commitment to implement a COMESA roadmap towards improving the business environment in the region and that he expected the country to shortly implement further reforms to address the facilitation of business operations. It was, however, agreed that there is a need to speed up the process. An official from the International Finance Corporation (IFC), Cemile Hacibeyoglu, pointed out that Zimbabwe could learn a lot from the experience of countries such as Rwanda, Zambia and Mauritius which have inmproved their rankings in the World Bank Doing Business Indicators. Zimbabwe’s ranking in these indicators is very low, but many people actually doing business in Zimbabwe do feel that Zimbabwe is very under-rated in these rankings

News from the Mining Sector

The Chamber of Mines recently held its Annual General Meeting. The Chamber President, Winston Chitando, who is also the CEO of Mimosa Mining Co, one of the country’s three major platinum producers, criticised unfriendly Government policies, including substantial increases in mining fees and the indigenisation regulations, as having stifled growth in the mining sector. However he also said that there is an opportunity for the development of a world-class mineral development policy that will guide the formulation of legislation, fiscal measures and other interventions to help the continued recovery of the mining sector. The mining sector will be making submissions to the Government on this.

The Minister of Mines and Mining Development, Hon Obert Mpofu, told the meeting that amendments to the existing Mines and Minerals Act will shortly be published. These, he said, will be designed to promote investment and sustainable development in the sector.

The Chamber of Mines has also announced the formation of a sub-sector association, the Platinum Producers’ Association (PPA), which will be specifically looking at the question of beneficiation of platinum minerals in Zimbabwe, to add value inside the country. The question of a platinum refinery being established in Zimbabwe has been raised on a number of occasions but current production levels will have to be increased to make such a project viable. There is also a clear reluctance on the part of foreign investors in the platinum sector, such as Impala Platinum, to consider investing in such a project until outstanding indigenisation issues have been finally resolved.

The demand for beneficiation inside the country is in line with a current international trend of resource nationalism, with many countries, Indonesia being one of the latest, claiming that mineral resources are national assets which should provide maximum benefit to domestic economies through beneficiation, taxation, increased local ownership or similar means. Resource nationalism has popular appeal for populist politicians.

Hwange Colliery expects to earn US$ 5 million per month from the export of coking coal and intends to use contracted port terminal space in Maputo for these exports. The National Railways of Zimbabwe is now reported to be operating a daily train to Maputo to carry the coking coal from Hwange to the port.

Government has announced that three joint venture companies between foreign and local investors have been shortlisted to resume mining operations at the Kamativi tin and tanatalite mine in north-western Zimbabwe. Kamativi closed in the mid-1990s as a result of depressed world prices for tin.

More Business and Economic News Snippets

The investment by Essar Africa Holdings in Ziscosteel and iron ore mining in Zimbabwe remains on hold due, reportedly, to disagreements between the Ministry of Mines and Mining Development and the Ministry of Industry of Commerce over the release of mineral rights to Essar. The major stumbling block appears to be large iron ore deposits in the south of the country, to which a former Ziscosteel employee has also laid claim.

Hwange Colliery Company has announced that it has established markets for coking coal in Europe and will be exporting 40 000 tonnes per month through Maputo in Mozambique. The company has also said it has confirmed markets in the Democratic Republic of the Congo and India. The biggest challenge remaining to this is the ability of the National Railways of Zimbabwe to move the coal.

Zimbabwe’s international debt problem remains of concern to the IMF, which is due to send its annual Article IV consultation team to Zimbabwe shortly. At the end of 2010 external debt stood at 118% of GDP, of which arrears made up 80% of GDP. While the economy has expanded, so has the external debt, which now equates to 103% of GDP – not as bad as Greece but more than enough for guaranteed economic stability in Zimbabwe. Other concerns expressed by the IMF are reported to include financial sector vulnerabilities, liquidity, high wage bills, ghost workers in the public sector and indigenisation.

Work on refurbishing the road from Plumtree on the Botswana border with Mutare on the Mozambique border was expected to start at the end of last month. The road links Plumtree to Bulawayo, the Midlands, Harare and then to Mutare. It is the first of two major road projects planned for Zimbabwe, the other being the Northern Corridor road from Beit Bridge on the border with South Africa through Harare to Chirundu on the Zambian border. The Plumtree-Mutare road is being financed through the Development Bank of Southern Africa and the work is being carried out by a South African contractor. The project is expected to be completed within 3 years at a cost of US$ 206 million.

The Zimbabwe International Trade Fair took place in Bulawayo at the end of April. The biggest foreign exhibitor was China, with 200 participants from 32 companies. South Africa was the second largest exhibitor and the South African pavilion was officially launched by the South African Deputy Minister of Trade and Industry. Other countries exhibiting at the Fair included Brazil, Kenya, Indonesia, Germany, Poland and Italy. However both Russia and India were absent. One press report, from the BBC, has suggested that this was a deliberate boycott “in protest against the country’s policy of taking control of foreign companies”.

Yet More on Indigenisation

A recent development in the on-going indigenisation saga has been a proposal by the Indigenisation Minister, Hon Saviour Kasukuwere, for a levy to raise funds to finance the purchase of shares in foreign-owned companies. How such a levy would work has not been made clear. The Indigenisation and Empowerment Act does make provision for the imposition of such levies, but they require the approval of the Minister of Finance, presently Hon Tendai Biti. Minister Biti clearly has no intention of doing anything about this, to the chagrin of Minister Kasukuwere, who has accused him of sabotaging the indigenisation drive. Minister Biti told a public policy group in the US, the Atlantic Centre, last month that the policy of acquiring 51% of foreign-owned businesses should be reviewed and that the best way to empower people at the present time is to expand the economy to create as many sectors as possible.

The Prime Minister, Hon Morgan Tsvangirai, has also emphasised that Minister Kasukuwere has no power in terms of the Indigenisation and Empowerment Act to unilaterally nationalise private businesses.

African Development Bank Monthly Economic Review – April 2012

In its latest monthly review of economic issues in Zimbabwe, the African Development Bank has focused in particular on Zimbabwe’s continuing negative trade balance. The Bank emphasises the need for Zimbabwe to develop policy strategies to incentivise value addition for exports. For the period 1 January – 2 March 2012 the value of export shipments increased by 6,2% over the same period the previous year. But it is the mining sector that is driving this. Mining contributed over 70% of these exports and the growth in mining sector exports grew by 23,4% from the first two month period on 2011 to the same period in 2012. In other words, non-mining exports are in relative decline. Tobacco exports declined by 42,6% and horticulture exports declined by two-thirds over the same period. Manufacturing exports increased by nearly 57%, but only contributed 8,1% of total exports. The Bank comments that this demonstrates limited value addition by local industries.

On the agriculture sector, the Bank noted that some 45% of the maize planted this season was written off due to irregular rainfall and drought in parts of the country. This is expected to lead to a deficit of one million tonnes in the country’s maize requirements for the year. With maize the biggest problem remains not so much drought but low productivity and low yields. The average yield for maize grown in Zimbabwe remains at about 750 kg per hectare. Good farmers do achieve yields in excess of 5 tonnes per hectare and some achieve yields as high as 10 – 13 tonnes per hectare. But the average yield remains appallingly low – for a number of reasons including reliance on inputs supplied by Government which are usually late or insufficient and lack of technical and extension services, as well as poor weather. If the average yield could merely be doubled to 1,5 tonnes per hectare, Zimbabwe would be easily self-sufficient in maize.

The tobacco sector is doing well this season, with 36,4 million kg having been sold through the auction floors at an average price of US$ 3,70 per kg as at the end of March 2012, compared to 30,1 million kg at an average price of US$ 3,03 per kg in the same period the previous year.

Gold deliveries grew at an average rate of 5,8% for the first three months of 2012 to reach a cumulative total of 3 127 kg. This represents an increase of 21,6% over the same period the previous year. The Bank attributes this partly to the more positive macroeconomic outlook in the country.

Interest rates for borrowing remain high in the financial sector. The commercial bank weighted average base lending rate over the period February 2011 – February 2012 was 12,1% per annum. The average base lending rate from merchant banks over the same period was 20,4%. The average rate of interest paid on 3 month deposits over the same period was 8,8%, reflecting the shortage of long-term deposits in the banking system. The savings deposit rate remained low at 2,3%. Banking sector deposits reached US$ 3,38 billion at the end of February 2012, of which long-term deposits made up only 8,8%. 59,6% of deposits were demand deposits. The average bank loan-to-deposit ration declined to 82,2% in February 2012, compared to a peak of 88,9% two monthe previously. As the major international banks in Zimbabwe tend to be cautious in their lending, this would indicate that there are banks in Zimbabwe with loan-to-deposit ratios in excess of 100% – not a healthy position to be in!

The Bank noted that Zimbabwe is the third largest country in respect of tourism receipts in Southern Africa, after South Africa and Botswana. As such the country needs to increase its infrastructure and tourism products.

Business and Economic News Snippets

The role in the Zimbabwe economy of remittances from Zimbabweans living outside the country has been highlighted by a recent report. The report, published by an organisation called People Against Suffering, Oppression and Poverty, estimates that remittances from South Africa to Zimbabwe in 2011 totalled around US$ 800 million. This conforms to the estimate in a Working Paper published by the UNDP that the value of total annual remittances to Zimbabwe from all Zimbabwean migrants abroad was US$ 1,4 billion annually. These figures are higher than estimates made by the IMF and the World Bank and could suggest that remittances play a more significant role in the national economy than generally thought to be the case. Many of the remittances are made through informal channels.

Nestle has announced its commitment to continue growing its business in Zimbabwe. An Nestle executive said that Zimbabwe is number threein Africa in th company’s core business and number two on nutrition. The company has announced plans to invest US$ 14 million on both commercial and small-scale dairy farming in Zimbabwe over the next seven years.

The Tobacco Industry and Marketing Board has announced that tobacco sales at the auction floors to date have increased this year in terms of both volume and value. Volumes have increased by 20,9% to 38,1 million kg while the average selling price has increased from US$ 3,02 per kg to US$ 3,72 per kg.

Tourism is being increasingly seen as a potentially valuable sector of the Zimbabwean economy. The Minister of Tourism, Hon Walter Mzembi, believes that tourism can contribute 15% of Zimbabwe’s GDP over the next few years. The Head of the UK’s Department for International Development office in Zimbabwe, Dave Fish, has described tourism as a key area of “massive potential” in the country’s economic recovery. A regional eco-tourism consultant has described Zimbabwe as being ahead of South Africa in hospitality, particularly in the lodges sub-sector. The proviso is, as always, that political stability is maintained and that there is no increase in the level of political violence before the next elections.

Positive Developments in the Mining Sector

Despite the ongoing issue of indigenisation, there has been some positive news from the mining sector recently. Mwana Africa, which is quoted on the Alternative Investment Market (AIM) in London and which holds a 53% shareholding in Bindura Nickel Corporation, has announced that it will raise US$ 35 million through a share offer that will bring China International Mining Group Corporation in as a shareholder. Part of the funds raised will be used to re-start operations at BNC’s Trojan Nickel Mine and concentrator in Bindura, which were put on care and maintenance in 2008.

Blanket Mine, owned by Caledonia Mining Corporation, announced a seventh successive increase in quarterly production for the fourth quarter of 2011. Production increased by 8% in volume terms. Turnover for the year increased by 150% to US$ 55,7 million and gross profit increased by 358% to US$ 29,1 million.

Metallon Gold Zimbabwe, a subsidiary of Metgold Ltd, which is South African owned but domiciled in the UK, has announced plans to restart operations at its How Mine South open pit mine outside Bulawayo.

It has been reported that there are currently 19 coal exploration projects in progress in Zimbabwe. However an industry expert has told a Zimbabwe coal conference that the future of the coal mining industry in Zimbabwe will depend on the construction of more thermal power stations to utilise low grades of coal.

Apart from indigenisation, Government has been pressing the platinum mines in Zimbabwe to establish a refinery in the country to process the mineral rather than send it to South Africa for processing. The cost is estimated to be US$ 2 billion. Zimplats has confirmed that it will commit to establishing a refinery “once issues to do with the indigenisation policy” are finalised. It has already set aside US$ 500 million for the project. Platinum production in Zimbabwe will have to be increased to make a refinery viable and both Zimplats and Mimosa have announced plans to increase production.

Gold production in Zimbabwe in 2011 was 12,8 tonnes. Platinum was 10,8 tonnes, palladium 8,2 tonnes, nickel 8 000 tonnes and chrome 600 000 tonnes. Coal production declined slightly to 2,56 million tonnes. Gold production for 2012 is forecast to remain unchanged at 13 tonnes. Mineral exports in 2011 totalled US$ 2,1 billion and are forecast to grow to US$ 2,6 billion in 2012. In value terms platinum accounted for 41,1% of exports, gold 38%, chrome 13,3%, coal 7,7% and diamonds 3,4%, although that last figure is certainly understated.

The Indigenisation Issue Continues Unabated

Whatever anybody might wish, the indigenisation issue is not going away and is not going to go away. Today is Zimbabwe’s Independence Day and the theme decreed by President Mugabe for the day’s celebrations is “Indigenisation and Economic Empowerment for Economic Transformation”. It is an issue that will remain in the forefront of the political economy of Zimbabwe until after the next election has taken place. In the meantime it will continue to be a source of political rhetoric, political argument and investor uncertainty.

On 5 April the Minister for Indigenisation, Hon Saviour Kasukuwere, announced that Government was taking over 51% of the shares of all foreign-owned mining companies that had not yet submitted an acceptable indigenisation plan to his Ministry. He said that profits accruing to the 51% now belong to the Government and warned those companies involved that attempts to defraud the State would be prosecuted. He has no legal power to do this – neither the Indigenisation and Economic Empowerment Act or any related legislation gives him such power – and this was quickly pointed out by the Prime Minister, Hon Morgan Tsvangirai, as well as by the Minister of Finance, Hon Tendai Biti. Minister Biti emphasised that the Government of Zimbabwe has no policy of nationalisation and that what Minister Kasukuwere was attempting to do is unconstitutional and unlawful. He described Minister Kasukuwere as “running amok” and said that many ZANU(PF) ministers in the Cabinet are equally opposed to Minister Kasukuwere’s drive to forcibly take over foreign-owned mines. The Minister of Economic Planning and Investment Promotion, Hon Tapiwa Mashakada, described Minister Kasukuwere’s decision as “null and void”. He went on to say “I want to assure investors that Zimbabwe is open for business as government is not going to expropriate or nationalise their companies.

Minister Mashakada also noted that although over US$ 6 billion of investment projects were approved last year, none of them have yet been implemented because of the overtones of expropriation and nationalisation coming from Minister Kasukewere. He quite correctly said that “Investors want predictability and consistency.”

Minister Kasukuwere responded by saying that he would not take orders from Prime Minister Tsvangirai and in a moment of extreme purple prose described himself as “Hitler tenfold” in his desire to obtain justice for his people and recognition of their independence. German visitors to Zimbabwe at the time were not impressed.

The latest mining company to have its indigenisation plan approved is Anglo-American Platinum, the owner of Unki Mine.

Earlier this week Minister Kasukuwere told the Reuters Africa Investment Summit in Johannesburg that he expected all the transactions involving indigenisation of mines to be completed by the end of this month. He did not, however, give any indication of how shares offered to the Government would be paid for but he did suggest that private sector players are involved in raising funds for the purchase of the shares on offer. There has been an unconfirmed report that a consortium of indigenous businessmen is seeking to raise the necessary capital to purchase a controlling interest in Unki Mine. It has to be said that the likelihood of such funds being raised is low. It will be recalled that Zimplats offered 15% of its shares to a local consortium in 2003 – an offer that remained on the table but was never taken up as the local businessmen were unable to raise the purchase price of the shares – US$ 31 million at the time.

Business and Economic News Snippets

Difficulties continue to delay the conclusion of Essar Africa’s investment in Ziscosteel and iron ore mining. President Mugabe is reported to be concerned over the matter and to have instructed ministers responsible to find a quick resolution to outstanding problems. One problem seems to be that some of the iron ore mining claims due to be transferred to Essar are being claimed by local individuals who are seeking to confirm their claims in the courts in Zimbabwe. Essar has been reported to be frustrated over the delays and even to be on the point of cancelling the investment. That, however, would seem unlikely to be allowed to happen, given Government’s interest in getting steel production under way again and Essar’s interest in Zimbabwe’s iron ore reserves.

It has been reported that Government has finalised a loan arrangement with a Chinese contractor for the construction of a water pipeline from the Zambezi River to Bulawayo at a cost of US$ 900 million. The Matabeleland Zambezi Water Project (MZWP) was first proposed 100 years ago but has never been implemented. The objective is to bring water from the Zambezi River to the low rainfall areas of Bulawayo and its surrounds. Successful completion of the project, the first stage of which will take four years, will have a significant impact on economic activity in the areas of agriculture, tourism, mining and manufacturing in Matabeleland.

Zimbabwe is reported to have short-listed eleven bidders for the expansion of the Hwange and Kariba South power generation plants. These two projects are expected to increase the country’s power generation capacity by 900 MW. Tenders are expected to be awarded by the end of the third quarter of the year.

The Ministry of Finance has published the “Zimbabwe Accelerated Arrears Clearance Debt and Development Strategy” (ZAADDS) through which it hopes to engage its international creditors in reducing its debt and clearing its debt arrears. Zimbabwe’s external debt is reported to be US$ 9,1 billion, or approximately 90% of estimated GDP for 2011. The country’s creditors include the World Bank, the African Development Bank and the IMF with respectively 45%, 21% and 22% of the country’s multilateral debt. US$ 3,3 billion is owed to the Paris Club, making up 85% of the country’s bilateral debt. According to the Minister of Finance, Hon Tendai Biti, the strategy includes both the adoption of traditional debt resolution initiatives and leveraging of the country’s national resources.

Government has also officially launched an Industrial Development Policy and a National Trade Policy. The draft Industrial Development Policy was published last year and places priority on development of agribusiness – comprising food and beverages, clothing and textiles, leather and footwear and wood and furniture – fertilisers and chemicals, pharmaceuticals and metals and electrical products as key industrial sectors. Growth in the manufacturing sector has been stagnating, due largely to a lack of access to capital for working capital purposes and for investment in new plant and equipment. It remains to be seen how effective any Industrial Development Policy can be, however well intentioned, unless the capital issue can be full addressed and overcome. The National Trade Policy focuses on increasing export levels – again issues of capital and competitiveness have to be addressed.

Indigenisation Disputes Continue

Minister Biti may have assured the Euromoney Investment Conference that there will be no indigenisation of foreign-owned banks. The following day the Minister of Inidgenisation, Hon Saviour Kasukuwere, made his opinion clear that foreign-onwed banks will be required to give majority owenership to indigenous Zimbabweans. There is now a direct conflict on this matter between Minister Kasukuwere on the one hand and Minister Biti and the Governor of the Reserve Bank of Zimbabwe, Dr Gideon Gono, on the other hand.

Minister Kasukuwere has also now said that Government will not make any payment for the mineral resources owned by foreign-owned mining companies. He was quoted a saying, “We are converting mineral resources in the ground in exchange for equity in mines. Where we are going to have shareholding, we are not going to pay.” It is quite clear that the Zimplats saga is far from over. The CEO of Impala Platinum, David Brown, has made it clear that no shares in Zimplats will be transferred without payment.

As the general election in Zimbabwe, anticipated to be held in 2013 at the latest, draws nearer, the level of rhetoric on the subject of indigenisation can be expected to increase. It is, after all, a major part of the policy platform of ZANU(PF). What does remain to be seen is how far Minister Kasukuwere will go with the limited legal powers that he has to enforce his threats. There is also the question of the Bilateral Investment Protection and Promotion Agreement (BIPPA) between South Africa and Zimbabwe – how will this be used to protect major South African investments in Zimbabwe? While Ministers Biti and Mashakada emphasise the positive aspects of Zimbabwe as an investment destination, the on-going disputes over indigenisation will only work against their efforts.