THIS article is a continuation of last week’s piece on the declaration of Victoria Falls as an International Finance Centre (IFC) and what needs to be done if this initiative is to become a success.
Need for a supportive policy environment for IFC establishment
Zimbabwe needs to create a conducive policy environment for financial experts to live and work in it. For instance, Singapore which Zimbabwe seeks to learn more from in the setting up of an IFC has also proven to be highly attractive for financial sector professionals, which in turn have contributed to Singapore’s pool of skilled financial sector workforce. This latter point was particularly crucial for Singapore’s successful development as a financial centre, with its skilled workforce being the third, and arguably most crucial, value proposition. Given the technical specificity of the financial services industry and global mobility of major financial institutions, Singapore’s relatively large pool of finance professionals has been seen as a “key reason” for financial institutions to operate in Singapore. In order to ensure the continued availability of such skilled labour, the country has introduced initiatives such as the Financial Sector Talent Development Scheme, Financial Training Scheme, Institute of Banking and Finance Standards Training Scheme, and Financial Scholarship Programme to facilitate the development of financial sector skills and expertise. Zimbabwe would also need to retrain most of its bankers in line with international standards in order to match the conditions offered by established IFCs.
Liquidity crunch in Zimbabwe
Zimbabwe is at the moment going through one of its worst liquidity crunch post the introduction of the multi-currency regime. Dollarisation in Zimbabwe brought with it stability and growth and people felt confident to recapitalise their businesses. How else could bank deposits grow from US$300 million in 2009 to over US$5,2 billion as of end of 2016 would be the question to be answered. Post-dollarisation in 2009, many Zimbabweans brought in funds from abroad in order to recapitalise their businesses. Hyperinflation had decimated the balance sheets of most companies in the previous years forcing corporates to inject fresh capital into their businesses. Between 2009 and 2012, Zimbabwe’s economy grew by over seven percent annually. Since 2013, growth has slowed significantly following the slump in commodity prices, weakening global growth, and a strong US dollar — all these factors have led to a dip in economic activity in the country. During the same period, however, non-performing loans (NPLs) in Zimbabwe increased significantly and the rate of growth in loans also declined. The rate of NPLs increased from below two percent in March 2009 to above 20 percent by September 2014, in tandem with the decline in real economic growth from 11,4 percent recorded in 2010 to an estimate of 3,1 percent in 2014.
The high levels of NPLs also reflect the lack of co-operation among banks in sharing customer information and the absence of a credit reference bureau, according to the RBZ. Because of the cash shortages that have seen most people sleeping in bank queues only for them to access as little as US$20 per day it becomes very difficult for Victoria Falls to be operationalised as an IFC because it will be difficult for people to move money between countries.
Tax regime and bank charges in Zimbabwe
At the moment most banks in Zimbabwe have been making obscene profits by charging their personal clients as much as US$5 per Real Time Gross Settlement System (RTGS) transaction and a further amount which can be as high as US$10 as monthly service charges for maintaining their accounts. In addition instead of most of these wire transfers being instant transactions they have tended to take many days and clients have had to take time from their busy schedules to trace and track the elusive transactions, losing many hours and costing the economy millions as desperate clients queue for hours on end at these banking institutions. If Victoria Falls is to be turned into an IFC most of these charges would need to be abolished in order to make it a favourable destination for finance.
Countries like Singapore which house IFCs have very low taxes in order to attract foreign direct investment inflows whereas Zimbabwe still has high taxation that is above 25 percent and is a deterrent to most investors. On the down side it can be realised that while tax benefits and secrecy allow IFCs to attract foreign investors, they also attract illicit capital and can produce numerous negative externalities. It is envisioned that the Victoria Falls IFC may grant tax incentives, including for instance a maximum 10-year tax holiday, along with value added tax (VAT) and customs exemptions. These provisions would still not be as generous as those of Qatar and some other IFCs; this then raises questions regarding Victoria Falls’ ability to attract investors, but also mitigates concerns that the IFC may attract those seeking tax evasion and avoidance. It is still unclear what level of secrecy the Victoria Falls IFC will afford to foreign and domestic investors. This is a crucial aspect that remains to be defined and that could determine what types of capital the IFC will attract.
Three main scenarios can be outlined. If Victoria Falls merely replicates conditions that are already available in other IFCs (eg Mauritius), this will likely not affect the volume of funds flowing into and out of the region and country. If Victoria Falls undercuts these other jurisdictions by offering more advantageous conditions, this may result in increased tax competition between IFCs in the region. Finally, if Zimbabwe manages to create an IFC that provides a gateway for investment into African countries, but without the harmful tax aspects and with no secrecy provisions, this has the potential to benefit other African countries, provided that businesses can be persuaded to channel their investments through it.
Zimbabwe has poor internet connectivity and most of its data charges are very expensive with the least internet bundles going for as much as US$5 per month for one to access Facebook and WhatsApp. This is one area where the country would have to improve on if Victoria Falls is to become an IFC. Good internet speeds and connectivity is necessary for swift transactions and the movement of large volumes of money. SEZ are not strategically set up to have links with the global economy. Zones need to be connected to global markets otherwise they cease to accomplish their mission of making an economy globally competitive. Zimbabwe however, currently lacks the infrastructure for such linkages such as roads and rail transport to link with ports.
Long-range Policy Planning
This ability to engage in sectorial targeting and niche creation is predicated upon the Government’s long-term approach to economic and financial policymaking. Such long-term policy planning often involves the convening of planning committees focused on mapping out a country’s long-term economic policy directions. Zimbabwe would need to come up with planning committees for the establishment of the SEZ framework and these can typically be comprised of policymakers, industry actors, and academic experts.
More importantly, these policy-planning committees should involve the participation of and solicited policy inputs from private sector industry actors as well as other non-state actors such as researchers and independent experts. By incorporating the policy inputs of industry and non-state actors, these processes will allow for the co-creation of policies by State and non-State actors.
More importantly, policy co-creation will contribute to greater regulatory compliance, with policymakers incorporating feedback received from industry partners and re-designing their regulations to minimise costs arising from overly-onerous regulations while at the same time, ensuring overall systemic stability. Aside from formal policy planning committees, policy co-creation can also occur through informal and continuous consultative interactions between regulators or policymakers and their industry partners, giving rise to a dense network of “policy relations” between State and non-State actors for the economic good of Zimbabwe.
Bureaucratic red tape
In most cases, red tape tends to overtake progress. A balance should therefore be struck between adequate political monitoring and freedom from Government bureaucracy. The costs of doing business are high in Zimbabwe due to overall constraining environment in terms of registration, licensing, taxation, trade logistics, customs clearance, foreign exchange and service delivery and therefore the One Stop Shop concept that the country has talked about so much has to fulfill its roles if investors are to come and bring in their hard earned money into an IFC set up in Victoria Falls.
– Butler Tambo is a Policy Analyst who works for the Centre for Public Engagement and can be contacted on firstname.lastname@example.org or +263776607524.