Zimbabwe Economy Profile: Invest in Zimbabwe by Kampamba Shula

Invest in Zimbabwe
If all you read and hear about Zimbabwe is from mainstream media you will probably miss out on key investment opportunities in Zimbabwe. The news that is inspiring rarely gets the kind of limelight its negative counterparts receive.But numbers don’t lie, Zimbabwe’s stock exchange was the third best performer in Africa in 2012, but you probably may have not known that. Either way, whether you are conversant with the remarkable investment opportunities in Zimbabwe or not this economic profile of the Zimbabwean economy will prove food for thought for any investor, whether local or international.

Overview
Real GDP growth is estimated to have decelerated to 3.7% in 2013 from an estimated 4.4% in 2012. This reflects a continued slowdown in the economy as a result of limited sources of capital, policy uncertainty and the high cost of doing business. Real GDP growth is projected to marginally improve to 4.0% in 2014. In 2013, inflation averaged about 4.1% and is projected to slightly slow down to 4.0% in 2014. Inflation developments will continue to be influenced by the USD/ZAR exchange rate, international oil prices and local utility charges. Persistent liquidity shortages combined with low effective demand and a weak South African rand will dampen inflationary pressures in the economy. The country experienced a decline in money supply in 2013. At the same time, the South African rand depreciated by about 20% in 2013.
Zimbabwe is experiencing a structural regression, with the acceleration of deindustrialisation and informalisation of the economy. On an annual basis, the share of the manufacturing sector in GDP peaked at 26.9% in 1992 before collapsing to 7.2% by 2002. The various Confederation of Zimbabwe Industries (CZI) Manufacturing Sector Surveys suggest that industrial capacity utilisation declined sharply from 35.8% in 2005 to 18.9% by 2007 and to less than 10.0% by 2008. It increased to 33.0% in 2009, 43.7% in 2010 and 57.2% in 2011, before declining again to 44.2% in 2012 and 39.6% in 2013. In 2004, 80% of jobs in Zimbabwe were in the informal sector, with the 2011 Labour Force Survey suggesting the rate had further increased to 84%.
The poor performance of domestic revenue inflows and the rise in recurrent expenditures will continue to constrain fiscal space, while the continued use of the multi-currency regime will result in monetary policy largely remaining unchanged. In 2013, the government unveiled the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZimASSET, 2013-18). ZimASSET has a number of positive elements, such as the adoption of results-based management and a clear implementation matrix.
Zimbabwe has faced an unprecedented sequence of events in the recent past years. The controversial land reform as well as hyperinflation that few countries have had the misfortune of experiencing lead to a situation where Zimbabwe now uses the US Dollar as its primary trading currency.
Given such a backdrop most investors would shy away and look for other emerging markets to invest in which is the precise point that I wish to differ with conventional investment views.
Let me explain it like this hyperinflation is indeed a phenomenon that no one wants in an ideal scenario. This Hyperinflation that occurred created an unusual incentive for investors to put their money in the stock exchange in Zimbabwe. The reason investors did this was to hedge their money against inflation. This had a startling effect the Zimbabwean stock exchange performed so well and was the 3rd best performing stock exchange in Africa for the year 2012.
Zimbabwe scored a year to date growth rate of 22.3% with an average weekly trading volume in the range of $7.2m.The Zimbabwe Stock Exchange, or ZSE, is the official stock exchange of Zimbabwe. It has been open to foreign investment since 1993. Despite the shrinking of the economy since 2000, the stock market inversely reacted to the factors that affected the economy negatively. The ZSE was driven mainly by speculation as investors sought to hedge against hyperinflation  (Kosmas Njanike, 2009).
The Zimbabwean government plans to demutualize the ZSE in order to expose it to market forces in line with global trends.
Zimbabwe is starting to show the first signs of an economic boom that could transform the country into one of the leading economic powers on the African continent.
“After decades of economic mismanagement and chaos, the country’s economy has been stabilized and an end has been put to the period of ruinous hyperinflation. The introduction of the US dollar as the national currency has in actuality eliminated the exchange rate risk and the conditions for doing business are better than in many neighboring countries. The arguments in favor of doing business in Zimbabwe include a high level of education and training among the population, a relatively large domestic market with purchasing power, natural resources and a good basic infrastructure that is still in place (SAFRI, 2013).
The Zimbabwe economy has traditionally been based on agriculture with tobacco being dominant. Other agricultural products are maize, cotton, tobacco, wheat, coffee, sugarcane, peanuts; sheep, goats, pigs. Mining has taken over as the main anchor of the economy with coal, gold, platinum, copper, nickel, tin, diamonds, clay, numerous metallic and nonmetallic ores as the main minerals (Deloitte, September 2012).
The other industries that make up the economy are steel; wood products, cement, chemicals, fertilizer, clothing and footwear, foodstuffs, beverages. Due to the prolonged period of economic stagnation opportunities are abound in Zimbabwe.
Zimbabwe’s rapid growth does put it in the recent company of some other sub-Saharan African countries. An analysis by The Economist finds that between 2001 and 2010, six of the world’s 10 fastest-growing economies were in sub-Saharan Africa.
Dubbed the “Lion Kings,” these countries include Angola, Chad, Ethiopia, Mozambique, Nigeria, and Rwanda. Over that decade, their annual GDP growth averaged between 7,9 and 11,1% and by 2011 Zimbabwe was out-performing all of them.
Zim Asset
In pursuit of a new trajectory of accelerated economic growth and wealth creation, The Zimbabwean Government formulated a new plan known as the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (Zim Asset): October 2013 - December 2018. Zim Asset was crafted to achieve sustainable development and social equity anchored on indigenization, empowerment and employment creation which will be largely propelled by the judicious exploitation of the country’s abundant human and natural resources.
Any investment in Zimbabwe in this period would need an accurate understanding of the Zim Asset to precisely quantify the risks involved.
This Results Based Agenda is built around four strategic clusters that will enable Zimbabwe to achieve economic growth and reposition the country as one of the strongest economies in the region and Africa. The four strategic clusters identified are:
• Food Security and Nutrition;
• Social Services and Poverty Eradication;
• Infrastructure and Utilities; and
• Value Addition and Beneficiation.

Economic Profile
Zimbabwe experienced a deteriorating economic and social environment since 2000 caused by illegal economic sanctions imposed by the Western countries. This resulted in a deep economic and social crisis characterised by a hyperinflationary environment and low industrial capacity utilization, leading to the overall decline in Gross Domestic Product (GDP) by 50% in 2008.
Zimbabwe is endowed with natural resources that are in abundance and these include rich mineral deposits, arable tracks of land, flora and fauna, abundant sunlight and water. Furthermore, one of the resources that give Zimbabwe a comparative advantage over regional and other international countries is its economic complexity, which includes the stronghuman resource base, which is an outcome of a deliberate educational policy instituted by the ZANU PF Government at Independence in 1980.
Zimbabwe’s economic complexity as defined in the “Atlas of Economic Complexity, Mapping Paths to Prosperity”, reflects the immense social accumulation of knowledge that has been embedded in the socio-economic ecosystem and productive structures of its economy. This may explain the resilience of the economy in the face of the debilitating illegal economic given the knowledge base and productive resource endowment of Zimbabwe, the country is projected to be a growth leader in Sub-Saharan Africa towards 2020.
After the economic decline from 2000, the cocktail of measures that were adopted by Government in 2009 resulted in some modicum of economic stabilisation, with Zimbabwe achieving a real GDP growth rate of 5.4% in 2009, 11.4% in 2010, reaching a peak of 11.9% in 2011. However, the recovery remained fragile as growth declined from 11.9% in 2011 to 10.6% in 2012 and 3.4% in 2013.
Drivers: Projected Growth Targets.
The key drivers for this growth and employment creation will be accelerated development through value addition processes in the:
i. Mining sector;
ii. Agriculture sector;
iii. Infrastructural sectors primarily focusing on power generation;
iv. Transport sector;
v. Tourism sector;
vi. ICT sector and
vii. Enhanced support for the SMEs and Co-operatives sector.
Debt
The economy has also been saddled with a high debt overhang with an estimated debt stock of US$10 billion as at December 2012 caused by the country’s failure to access international capital and investment inflows as illegal economic sanctions have not been removed.

Agriculture

However, Zimbabwe’s economy has struggled, agriculture more so than most other sectors, to cope with the combined effects of the Fast Track Land Reform Programme (FTLRP), hyperinflation, capital constraints and government controls on markets. Zimbabwe’s real GDP declined by more than 71% between 2000 and 2008 (Robertson, 2011) with overall agricultural production declining by 30% over the same period (Sukume & Guveya, 2009). The government’s land reform programme and the subsequent collapse of the agricultural sector, which once provided 400 000 jobs and was the country’s main source of export revenues and foreign exchange, are seen as the prime cause of the prolonged economic crisis (Richardson, 2004). The deterioration of commercial agriculture and the sector in general, which led to the country becoming a net importer of food by 2002, has resulted in a substantial fall in formal employment opportunities, output, exports and secondary demand generated by the modern or capitalised sector (World Bank & Government of Zimbabwe, 2010).
Ever since the imposition of illegal sanctions, Agricultural production was also severely affected, resulting in the country depending on imports to meet the demand for domestic consumption and industrial needs.
The agricultural sector, being the backbone of the economy underpinning economic growth, food security and poverty eradication, continues to experience severe systemic challenges within its entire value chain ranging from lack of agricultural financing to lack of affordable inputs. This has also been exacerbated by prolonged periods of drought caused by climatic changes.
Zimbabwe’s agricultural sector has emerged from a prolonged period of structural change, in the context of shifts in the social, political and economic environments. Of particular note are the shifts in the scale of operations and the composition of the farming sector since 2000. This occurred concomitantly with major financial upheaval, which involved protracted periods of hyperinflation, followed by the liberalisation of markets and the eventual shift to the use of foreign exchange in late 2008.
Zimbabwe’s agricultural sector has long been key to its economic stability and growth. Not only does it form the basis of the direct and indirect livelihoods of almost 70% of the population, but economic growth is also directly linked to the performance of this sector. The growth and development of agriculture are expected to support the improvement and growth of the other sectors of the economy, namely industry and services. Although the agricultural gross domestic product (GDP) is expected to decrease slightly (to 12%), it will remain significant for Zimbabwe’s transitional economy (Robertson, 2011), contributes 30% of formal employment (Kapuya et al., 2010) and representing the largest single source of export earnings.
Despite various arguments about specific approaches to re-establishing Zimbabwe’s agriculture and economy, a number of characteristics and challenges will have to be considered:
Productivity is low, which is related to a low level of capital endowment, leading to a restricted uptake of productive farm technologies and, subsequently, to low yield and output (ZimVAC, 2009). A first objective for Zimbabwe’s agricultural reconstruction will be to increase productivity levels again (perhaps not to the levels seen before 2000, as the sector’s structure has changed, but at least to levels similar to or higher than what communal and small-scale farmers were reaching before fast track land reform). With the production bases in place, the result of a well-structured sector before 2000, revitalisation of the sector will often not take much. This makes the Zimbabwean case different from that of many failed states. A good example of revitalisation is the significant growth in the tobacco and cotton sectors. Although Zimbabwe’s reconstruction should be broad-based, including a wide range of agricultural and non-agricultural subsectors, it makes sense – in the framework of this project – to focus first on basic food crops that require minor investments, such as maize and extensive livestock production. Reaching past production and productivity levels in these sectors would enable Zimbabwe to reach food autonomy. Other crops, such as small grains (irrigation-sensitive) and poultry (capital-intensive), will follow rapidly once the basic conditions have been established.
The mobilisation and investment of financial resources in agriculture need the requisite factors of production and exchange. The necessary conditions for any effective sectoral recovery strategy (as with any other economic activity) would include: the rapid reorientation of all farming efforts to respond to available markets; a gradual increase in efficiency in production at all scales of operation; the availability and adequate quality of inputs and services; affordable financial arrangements for working capital and seasonal operations, as well as investment in productive assets; and positive expectations among farmers, entrepreneurs and all others operating in value chains. Attaining these fundamental groundwork goals will require a concerted investment of government resources in the agricultural sector.
Zimbabwe has an enviable resource endowment for agricultural development, in terms of land and water resources, sunk investments, expertise, demand for exports and even a conducive climate, notwithstanding the unpredictability of rainfall patterns within seasons and between years (World Bank & Government of Zimbabwe, 2010). However, the agricultural sector is now characterised by an entirely new structure. It is mainly composed of small-scale and newly resettled farmers, practicing their activities on non-titled land. In contrast, a decade ago, the sector was composed of well-established, large-scale commercial enterprises on private land. This raises new questions and requires new instruments.

Despite the modest contribution of agriculture to the GDP, the importance of the sector should not be underestimated, all the more so since the post-2000 collapse of the economy.First, agriculture forms the basis of the direct and indirect livelihoods of almost 70% of Zimbabwe’s population. With the economic crisis, formal sector employment started to decline. From a peak of 1 241 500 in 1998 (i.e. a 68% unemployment rate), it fell to 1 012 900 in 2002 (i.e. 80% unemployment) and to an estimated 400 000 presently. The formal employment rate is estimated at between 5% and 10%.3 This represents a compound annual growth rate of –5.0%. A large element of this was the loss of the formal agricultural employment: estimated at 345 100 in 1998, it fell to below 100 000 after the country’s controversial land reform programme (Luebker, 2008). Non-agricultural employment also fell from 896 400 in 1998 to 300 000 (which includes about 245 000 public servants).
Finance: Agricultural Finance Problem
The formal banking sector has been reluctant to service the agricultural sector, owing to a number of factors, particularly land insecurity. The commercial banks held that the nationalisation of land under the land redistribution programme has rendered land a ‘dead’ asset, which cannot be used as collateral for agricultural loan applications. In its November 2005 report to Parliament, the Portfolio Committee on Lands, Land Reform, Resettlement and Agriculture said that it was ‘concerned to note that the current financing facilities are tailor-made for large-scale commercial farmers at the expense of smallholders’. So officially, there is a policy on agriculture finance, but it is not being implemented.Provisions in this framework were overtaken by events before implementation. It was later abandoned for the National Agricultural Strategy Framework, 2005–2035,

Mining

The mining sector continues to be a major foreign currency earner and has potential to become the pillar for economic growth through value addition and beneficiation. However, the sector continues to be constrained by energy and transport infrastructure challenges, depressed international mineral prices and shortage of utilities among other factors.
The Government, through the 2014 National Budget, announced proposals to amend the mining laws, thereby decriminalizing the operation of small-scale miners to allow more locals to participate in the exploitation of the country’s mineral wealth. The amendment of mining laws will allow the government to repossess unused mining claims from holders on a “use it or lose it” basis. The repossessed mining claims will be allocated to small-scale miners in accordance with the indigenization and economic empowerment drive.
With rock ages spanning a period of more than 3000 million years, Zimbabwe's heterogeneous geological environment is favourable to occurrences of a varietyof minerals.
• Zimbabwe has over 60 known economic minerals BUT only 40 have commercially been exploited.
• Despite the huge mineral endowment, exploitation both upstream and downstream has been limited.
• Some of the commonly exploited minerals include diamonds, gold, PGMs, chrome, tantalite, granite and coal
There are also other pieces of legislation that govern foreign investment such as:

• The Zimbabwe Investment Authority Act and
• The Indigenization and Empowerment Act
•  The Minerals Marketing Corporation Act
• The Zimbabwe Mining Development Corporation Act
• Precious Stones Trade Act

Mining Investment Opportunities

Opportunities exists through Joint Ventures with

• ZMDC (Government),small scale miners, and other mining companies facing financial constraints.
• Most mining operations suffer from undercapitalisation and are, therefore, in need of recapitalisation through financial injections. Most mines are currently operating slightly above 50% of their capacities due to lack of finances for recapitalisation.
• Companies also face shortage of relevant skilled personnel for their mining operations
• Opportunities also exist in the provision of mining equipment and technical services relevant to mining.

Greenfield Exploration – previous exploration concentrated around ancient workings.

• Brownfield exploration – opportunities exist for re-valuating the over 4000 known mineral deposits.

There are opportunities for using modern exploration techniques such as high resolution geophysics, satellite imagery and geochemistry that have not been used to greater extent in the country.

• Government through Zimbabwe Mining Development Corporation (ZMDC) has resuscitated a Government owned exploration company called Mining Promotion Corporation (MPC) (Pvt) Ltd to spearhead exploration and development of mining projects through undertaking feasibility studies.
•  Partners are therefore being invited to work with MPC in undertaking exploration and later on mining of identified potential projects.
• Skilled staff are also required to capacitate the company to effectively conduct its operations.

Tourism
Tourism has, as a sector, demonstrated tremendous potential, particularly benefiting from the successful co-hosting of the 20th Session of the United Nations World Tourism Organisation (UNWTO) General Assembly by Zimbabwe and Zambia. The sector however, still faces some challenges, key among them, perceived country risk, poor connectivity of local destinations and absence of a revolving fund to support the hospitality industry, especially SMEs and Co-operatives in tourism.
In the wake of the successful co-hosting of the 20th Session of the UNWTO General Assembly by Zimbabwe and Zambia, the tourism sector has proven to be a major economic pillar currently contributing 10% of the Gross Domestic Product. The contribution is expected to increase to 15% by 2015. Furthermore, this key economic driver will be supported by implementing a National Tourism Policy, continued improvement of the country’s image and aggressive marketing efforts.

Real Estate and Housing
On the housing front, the country faces a huge backlog estimated at 1,25 million units due to rising housing demand in urban and resettled areas as a consequence of the Land Reform

Manufacturing
Problems
The manufacturing sector remains in crisis with capacity utilisation declining from an average of 57% in 2011, 44% in 2012 and 39% in the 3rd quarter of 2013. This is attributable to structural and infrastructural bottlenecks such as erratic power supply, obsolete machinery and dilapidated infrastructure as well as lack of and high cost of capital, hence negatively affecting value addition and beneficiation as well as employment creation.
Opportunities
In the manufacturing sector, Government is totally committed to resuscitating distressed and closed companies with a view to increasing capacity utilization to optimum levels, generatingemployment and substituting imports as well as building asustainable basis for export led growth. In this regard, the Industrial Development Corporation (IDC) will be recapitalized and its operations refocused as one of the key investment vehicles to assist ailing industries.
One of the key strategies in the Zim Asset is implementing an Import Substitution programme (particularly to address machinery, equipment, fuels, chemicals and consumer products). To fully capitalise on this an investor can place their production in a specific product that aligns itself with this strategy so long as it is part of their initial product range.

Energy

Energy is a key enabler to productivity and socio-economic development. However, the sector has experienced challenges largely due to dilapidated and obsolete generation equipment and infrastructure as well as inadequate financing and capitalisation and other structural bottlenecks. Sustainable Energy Pioneer
It is no secret that sustainable energy and alternative energy is an industry for the future and in this regard Zimbabwe is a pioneer in Africa. It may not look like the case now with political clouds hanging over Zimbabwe but if you take a closer look at Zimbabwe you will observe that they are spearheading in sustainable clean energy.
Global warming sentiment is something that developed nations are trying to address the problem here is that their economies were built on fossil fuels which has placed the bulk of their drive leveraged on this fact.
It may seem hard to understand for some but the truth is that for developing nations there is a greater opportunity to base their growth and development on sustainable energy sources in comparison to their developed counterparts across the globe.
Ethanol has been successfully produced from sugarcane in Zimbabwe over the past ten years whilst maintaining a favorable energy output to input ratio of 1:1.9. It is shown that it is practicable to improve this ratio to between 3.8 and 4.1 by operational changes such as maximizing ethanol production during the cane crushing season and storing surplus bagasse for use during the off crop season in place of coal which is presently used. Further improvements are also possible by the introduction of more efficient boilers, increasing surplus bagasse availability during the off crop season, and the greater use of stillage as a fertilizer (A.D. Rosenschein, 1992).
The rising cost of lead additives and of gasoline, and the falling cost of ethanol and sugarcane, has created favorable economic conditions for fuel-ethanol production. In Africa, where lead additives are still heavily used and where sugarcane production is high, ethanol can be a cheap source of octane. More than enough sugarcane is produced in Africa to replace all the lead used in African gasoline; this would require Africa to produce about 20% of amount of ethanol currently produced in Brazil, and would require the shift of some sugar production to ethanol production. At a more modest scale, African countries that could replace lead with ethanol using primarily their by-product molasses production include Zimbabwe, Kenya, Egypt, Zaire, Zambia, Sudan, Swaziland, and Mauritius (Valerie Thomas, November 2001).
There is increasing interest in Zimbabwe in the use of renewable energy sources as a means of meeting the country's energy requirements. Biomass provides 47% of the gross energy consumption in Zimbabwe. Energy can be derived from various forms of biomass using various available conversion technologies. Crop residues constitute a large part of the biomass available from the country's agriculture-based economy.
Currently, Zimbabwe has 70 MW of capacity for electricity from sugarcane bagasse. In addition to bagasse, sugarcane processing also produces molasses, which is used for the production of ethanol.
Bio Diesel Jatropha

Biodiesel has attracted considerable attention during the past decade as a renewable, biodegradable and non-toxic fuel alternative to fossil fuels. Biodiesel can be obtained from vegetable oils (both edible and non-edible) and from animal fat. Jatropha curcas Linnaeus, a multipurpose plant, contains high amount of oil in its seeds which can be converted to biodiesel. J. curcas is probably the most highly promoted oilseed crop at present in the world. The availability and sustainability of sufficient supplies of less expensive feedstock in the form of vegetable oils, particularly J. curcas and efficient processing technology to biodiesel will be crucial determinants of delivering a competitive biodiesel. Oil contents, physicochemical properties, fatty acid composition of J. curcas reported in literature are provided in this review. The fuel properties of Jatropha biodiesel are comparable to those of fossil diesel and confirm to the American and European standards (Parawira, 2010).
There is increasing interest in Zimbabwe in developing a biofuels industry based on the production of biodiesel using Jatropha as the main feedstock. This has led to the introduction of Jatropha as a commercial energy crop in the country.
Due to its perceived benefits, the growing of the J. curcas is shifting from small-scale farmers to tight-controlled corporate production either on large plantations or through stringent contract production in India, Burma, Saudi Arabia, Malaysia, Indonesia, Philippines, China, Ghana, South Africa, Senegal, Nigeria, Tanzania, Ethiopia, Zambia and Zimbabwe among other countries. Introducing an alien species at large scale in the environment, even if it can potentially contribute to rural employment and poverty alleviation, needs serious consideration. The claimed tolerance of J. curcas to pests and diseases on few dispersed trees might not apply in general to trees in plantations. Indeed Jatropha can grow in the semi-arid lands but may be without any commercial yield being achieved. There is increasing evidence that seed yields are sensitive to soil fertility and moisture availability (Parawira, 2010).
Zimbabwe’s Jatropha biodiesel project remains in limbo amid indications that the government is still carrying out tests to assess the viability of the project five years since a plant was commissioned (NewsDay, 2013).
In an apparent U-turn, Science and Technology minister Heneri Dzinotyiwei said government had no immediate plans to produce fuel from the jatropha plant on a commercial scale. He added that  there has been misconception on the production of Jatropha fuel on a commercial scale.
Dzinotyiwei said nowhere in the world is Jatropha produced at a large scale.
Opportunities
Zimbabwe is endowed with mineral deposits. Major mineral resources include: gold, diamonds, copper, coal, nickel and platinum, among others. Links between sectors, particularly manufacturing and mining, is key for Zimbabwe’s broad-based growth.
An African Development Bank (AfDB) study estimates Zimbabwe’s infrastructure gap at a daunting USD 14billion.