Research Desk
Key Empirical Barriers to Diasporan Investor Confidence
The first sentence of Leo Tolstoy's novel Anna Karenina is: "Happy families are all alike; every unhappy family is unhappy in its own way”. Much like Tolstoy’s happy families, the favored global venues among investors - those happy economies - all have similar core qualities:
Trustworthy government
Highly liquid capital markets
Low opportunity cost of investment
Overall ease of doing business
Interest and volume of foreign direct investment is heavily impacted by deficits in one or more of these qualities. In the case of Zimbabwe, there are severe issues across all four that will continue to make Zimbabwe an unattractive space for general investment, regardless of the “Open for business” mantra.

Government Trustworthiness

In the context of investment, a trustworthy government is one that is seen to be predictable (ie behaviors conform to written laws), reasonable (rules are enforced in a generally equitable and consistent manner), and restrained (government extracts far less - via taxes, tariffs and fees - than the maximum it actually could, specifically in order to allow economic activity to thrive).
From both a general foreign investor’s perspective, and specifically a Diasporan investor’s perspective, Zimbabwe’s government has historically and continues to suffer from trustworthiness issues for a number of concrete reasons:

Policy inconsistency

Zimbabwe’s general policy environment is rife with policy inconsistency and lack of proper policy communication. This broadly observed inconsistency of policy (source 1, source 2, source 3) suggests a lack of consistent economic frameworks or theory of economic growth behind government decisions, appearing to outsiders instead to be more opportunistic and focused primarily on appeasement of political insiders without concern for the overall viability of investing in the economy.
In many areas, such as solar power generation, there is a lack of clear technical specification to govern investor behavior. The net result is that each project - if big enough to require formal licensing - ends up having to negotiate individual terms with government. Which exposes government bureaucracy to extremely high risk of corruption.
Beyond lack of technical specifications, there is an overall lack of broadcast communication of policy changes in their entirety to the public. There is a general lack of reliable information from the government on financial, regulatory, and monetary policies, making it very difficult for prospective investors to perform proper market diligence and make accurate projections about overall market conditions. As an example, most of the market data upon which this paper’s analysis is based comes from outside sources - for many datapoints such as House Price Index, Consumer Price Index, and historical datasets related to equities, interest rates and more, no official repository from the Zimbabwean government even exists.
The extent of poor policy communication is such that often, lower level bureaucrats themselves are unaware of recent top-level changes. Which means that investors frequently have to bypass standard licensing/approval processes and go straight to top-level officials to ensure proper project or business review - again exposing high risk of corruption, demands for bribes, one-off deals, or competing political insiders getting access to privileged information.

Insider Dealing

While insider trading and other forms of corruption are statutorily illegal in Zimbabwe, there is a lack of independent institutions empowered to drive enforcement. Independence here refers to clear separation between members of government and enforcement institutions as well as “rule of law” balances that protect enforcement bodies from government interference in the lawful execution of duties. In essence, enforcement of anti-corruption laws are almost entirely politically motivated, rather than enforced in a generally equitable and consistent manner.
Moreover, regulatory bodies, enforcement authorities and/or other role-players have inadequate resources to effectively and timeously detect, investigate and prosecute insider trading activities in the Zimbabwean financial institutions and financial markets. Another challenge affecting the enforcement of the anti-insider trading prohibition is the lack of cooperation between regulatory bodies and/or enforcement authorities and other role-players responsible for enforcing the insider trading laws in Zimbabwe. Notably, such enforcement authorities and role-players include the Securities and Exchange Commission of Zimbabwe (SECZ), the Zimbabwe Stock Exchange (ZSE) and the courts (source).
With insider dealing allowed to run rampant due to declawing of erstwhile enforcement agencies - through either outright government fiat or by deliberate under resourcing - insiders have free reign to cannibalize legitimate investment ventures. The lack of a truly independent judiciary also signals to investors that there is no recourse for bad faith activities on the part of either government or connected insiders. If government accountability to investors is only based on convenience, rather than based on transparent rules of engagement, then we see the wrong kind of predictability - where investors will expect to lose their principle if their returns are in conflict with the personal financial interests of political insiders.

Enforcement of Property Rights

Uneven enforcement of property rights is a particular concern for Zimbabweans in rural or agricultural communities. Beyond the well-documented land seizures from white commercial farmers in the early 2000’s, there are unresolved issues around legal protections for widows previously married under customary convention - as opposed to officially registered - for indigenous Zimbabwean communities living on or near land under which mining concerns exist, and black farmers not part of the political elite who have been granted state-owned land leases.
Women married via traditional, customary practice have neither legal protection nor recourse to property seizure by in-laws in the event of their husband dying (source). This is in spite of equal protections of women supposedly guaranteed by the revised 2013 constitution. Given the prevalence of customary marriages in rural Zimbabwean settings compared with urban settings, this has a particularly outsized impact on rural Zimbabwean poverty.
Similarly, indigenous Zimbabwean communities living on tribal lands are engaged in continuous struggle with foreign mining enterprises. As mining represents 16% of the country’s GDP and 60% of its foreign exchange earnings, the government is heavily dependent on mining operations to drive foreign currency inflows. This is recognized in allowing special dispensation to mining companies to hold earned foreign currency beyond the 60 day limit imposed by the Reserve Bank on all forex business income (source). Dependence on the mining sector has meant that possession of land in areas with mineral rights has become contentious, and many rural communities have been subject to mining-induced displacement and resettlement (source). Beyond displacement, rural communities have little to no recourse for the damage to their livelihoods caused by negative environmental externalities of mining activities (source).
Additionally, the indigenization policy pursued by former President Mugabe in 2010 allowed native Zimbabweans (predominantly political insiders) to take over industrial, financial, mining, and other properties owned by foreigners. This further eroded the fragile Zimbabwean economy, as investor trust was undermined by the possibility of indigenization and the capricious ways in which it appeared to be proceeding. While government has since amended the indigenization law to apply only to designated diamond and platinum mining operations as well as 12 sectors in 2018 which include: transportation (passenger buses, taxis and car hire services); retail and wholesale trade; barber shops, hairdressing and beauty salons; employment agencies; estate agencies; valet services; grain milling; bakeries; tobacco grading and packaging; advertising agencies; provision of local arts and crafts and their marketing and distribution; and artisanal mining (source). Foreign investors and non-citizens - which applies to virtually all 2nd generation Diasporans - must obtain approval to open a business in a reserved sector from the relevant Minister.
The requirement of majority stake held by Zimbabwean citizens in key sectors creates considerable opportunity for abuse by political insiders - given the nation’s recent history, foreigners being forced out of successful businesses is not outside the realm of possibility. Even beyond such abuses, the law presents a high risk of undercapitalization, as citizen stakeholders are entitled to majority share without being subject to capital infusion requirements commensurate with their stake in the business. In general, the indigenization law creates an environment that disincentivizes foreign investment when other more robust economies have no such requirement.
Lastly, the most insidious component of the lack of property rights lies in the relationship between the government and the black farmers it has allocated state lands to via 99-year leases. With these leases, lessees do not hold title to the land. The lack of title means that farmers cannot borrow working capital from banks using the value of the land as collateral, and so remain heavily undercapitalized (source). This lack of access to capital for a large class of farmers has played a non-trivial role in the collapse of Zimbabwe as a net exporter of farm produce. It also serves as a tool for keeping farmers financially and in some cases operationally dependent on the government; unable to freely operate based on market demands and their own innovative capacity.

Capital Markets Liquidity

Liquidity describes the extent to which an asset can be bought and sold quickly, and at stable prices. In simple terms, it is a measure of how many buyers and sellers are present, and whether transactions can take place easily. Usually, liquidity is calculated by taking the volume of trades or the volume of pending trades currently on the market.
High levels of liquidity arise when there is a significant level of trading activity and when there is both high supply and demand for an asset, as it is easier to find a buyer or seller. If there are only a few market participants, trading infrequently, it is said to be an illiquid market or to have low liquidity. In a liquid market, a seller will quickly find a buyer without having to cut the price of the asset to make it attractive. And conversely a buyer won’t have to pay an increased amount to secure the asset they want.
Additionally, liquidity can also refer to the extent to which there is a market for either government debt or the currency that is effectively backed by guarantee of repayment of said government debt. Essentially demand by investors seeking to hold or transact in the local currency. Highly liquid currencies like the US dollar are sought after because the credit rating of the guarantor (in this case the US government) give investors high confidence that they will be paid back on maturity of the debt and because of the significant network effects behind the widespread usage of the US dollar as a stable transactional currency.
It is clear why investors would prefer to put their money in highly liquid markets, and avoid those that are highly illiquid.
Here again is where Zimbabwe will continue to struggle to attract even Diaspora investors. The local economy suffers from two parallel conditions that serve to dry up liquidity in capital markets: Hyperinflation and weak local currency.

Hyperinflation and Currency

Since the early 2000’s, Zimbabwe has had significant struggles with runaway inflation, having one of the world’s worst cases of hyperinflation in the 21st century. Critically, the first bout with hyperinflation in the early 2000’s was a harbinger of the institutional trust issues that continue to discourage foreign and Diaspora investment into the country.
These issues stem from a number of factors:

Asset Seizures

Widespread asset seizure from white farmers in the late 1990’s, with seized assets assigned to party loyalists whose performance on those assets were orders of magnitude lower than the prior owners. This had a knock-on effect of crippling domestic output from the agricultural sector as well as completely killing investor trust in the same blow. The decade of 1999-2009 saw not only a sustained drop in food production, but also saw capital available first to farmers, then to manufacturers drying up almost entirely. The overall financial market became highly illiquid, with government becoming the primary market maker, which as is the common theme here creates tremendous opportunity for insider dealing

Undisciplined Monetary Expansion

Lack of discipline and transparency over money printing, which included underreporting how much money was printed to finance the Second Congo War by as much as $23M per month in 2000 (source). While not directly confirmed, another suspected factor behind excessive money printing is self-dealing and insider dealing. Suspicion of self-dealing comes from a combination of the jump in money supply commensurate with the level of hyperinflation experienced during the 2000-2010 period (source) along with the heavy lack of transparency and reported institutional corruption by third party monitoring agencies (source).

Debt Monetization Combined with High Interest Rates

Zimbabwe’s central bank, RBZ, has adopted a strategy of debt monetization. Debt monetization is the practice of a government borrowing money from the central bank to finance public spending instead of selling bonds to private investors or raising taxes. It is something of a trend at this point of the 21st century - seeing widespread adoption not just in Zimbabwe, but also the United States, UK and other OECD nations (source). Debt monetization can be inherently inflationary, and western governments have typically managed this through a combination of near zero key interest rates and quantitative easing - central bank purchasing longer-term securities from the open market in order to increase the money supply and encourage lending and investment. For reasons that will be discussed below, the RBZ’s specific approach to preserving the forex value of the Zimbabwean dollar precludes the use of those twin tactics, and as result, strongly discourages private sector lending by banks, as key interest rates have reached 60% as of October 2021(source).
The first bout of runaway, triple digit inflation was managed by first redenominating the Zimbabwean dollar three times between 2005 and 2009, finally abandoning the local currency and adopting the US dollar in 2015. After a 4 year period, the demonetized 3rd redenomination of the Zimbabwe dollar (ZWL) was reintroduced as primary currency in 2019 as a real-time gross settlement dollar. However, as the core institutional and financial issues behind hyperinflation such as lack of foreign currency reserves, political insider cannibalization of private sector activity, and debt monetization simultaneous with high key interest rates were not sufficiently addressed. Hyperinflation immediately returned and once again Zimbabwe has experienced the highest levels of inflation in the world. By March 2020, RBZ attempted to peg the ZWL to the USD at a $25ZWL to $1USD rate. But the natural market response was parallel markets, with the ZWL trading at a valuation much lower than the official USD peg. More importantly, even as local currency prices have inflated, USD prices have remained relatively stable (source). This discrepancy, and the demand for parallel markets, is evident in the official ZWL-USD exchange trading at a 60% discount of the actual rate as priced by market demand (source) as of October 2021.
RBZ’s response to this new round of hyperinflation has been fivefold
  1. 1.
    Introducing a weekly foreign exchange auction system to allow for market influence on pricing, but still allowing firm control over official exchange rates
  2. 2.
    Placing strict controls over use of funds by businesses that purchase foreign currency via auctions
  3. 3.
    Mandating the use of ZWL for private and informal sector transactions
  4. 4.
    Aggressively excluding citizens from economic participation if they attempt to either circumvent foreign currency controls or transact with Zim dollars at true market value
  5. 5.
    Converting USD held in domestic bank accounts to ZWL (source)
The current foreign exchange regime acts essentially as an implicit tax on foreign currency holders, and means that every unit of foreign currency brought into the country through approved channels will be sold to the government at a discount, in return for ZWL whose utility only exists via forced adoption.
The overall approach appears to be to create demand for local currency by force to the point of attempting to control flow of foreign currency through the economy down to the transactional level. Effectively, making Zimbabwe a command-style economy with few true free market principles.
Again, it is the prerogative of the government to manage the economy by whatever economic principles it sees fit. However, the value of any currency is dependent on market perception of the issuer/guarantor of currency value. Zimbabwe’s poor track record of economic stewardship and lack of steady, consistent GDP growth (source) means that any currency managed by the current political regime will be viewed disfavorably by investors globally. An objective review of Zimbabwe’s current debt service-to-revenue ratio, total debts in serious arrears, and new debt only available at cost far higher than typical sovereign debt (6-9%) suggests that the country will remain in a debt trap indefinitely (source) until it focuses on economic objectives centered more on growth and liquidity than on controlling currency value at all costs.
Indeed, the November 2021 virtual IMF mission with Zimbabwe confirmed that the nation’s $10.5B debt overhang owed to international institutions such as the Paris Club, African Development Bank and the World Bank - 86% of GDP - will prevent it from accessing further loans from multilateral lenders. Conditions for further development loans from the IMF would require “a clear path to comprehensive restructuring of Zimbabwe’s external debt, including the clearance of arrears and obtaining financing assurances from creditors (source).”

Banking Grey List

As a result of global perception of “above normal” levels of corruption, money laundering and insider dealing, Zimbabwe is on financial sector grey lists for many economic regions. Functionally what this means is that banks in grey-listing countries either have heightened reporting requirements for transactions involving entities domiciled in Zimbabwe or transactions are explicitly not allowed.
Zimbabwe is grey listed by the EU and the Financial Action Task Force(source). While it is not grey listed by the US, sanctions placed on high-ranking officials mean that American retail banks have informally grey listed transactions and transfers directly with accounts domiciled in Zimbabwe, as a blanket measure of avoiding liability for dealing with sanctioned individuals.
From a Diasporan perspective, this means that the primary method of rapidly sending foreign currency into Zimbabwe is via remittances, which is one of the most expensive methods of sending cash, with an average of 9.9% cost per transaction - or nearly $20 in fees per $200 remitted (source).

Unemployment and Informal Sector

A sign of the significant liquidity issues that affect the country, roughly 85% of labor participants in Zimbabwe earn their income via informal sources of employment. Their aggregate activities make up roughly 40% of the country’s GDP (source). Also telling is that the official unemployment rate sits at 5.7% (source). This suggests a very high labor participation rate, but insufficient liquidity in the form of credit (ie lines of credit for payroll or operating costs that are typical in more highly developed economies) or business loans for operating capital. This large formal sector is a direct outcome of the central bank’s inability to participate in the private sector fully - a result of the massive government debt burden it has taken on, debt from a government whose future cash flows are unpredictable due to the vicious cycle of how it cannibalizes its own private sector and potential future tax revenues.
Functionally for businesses, and by extension for labor participants, this means that financing to scale operations is largely unavailable, placing a hard cap on revenue generation potential for any business that lacks the political or financial connections to access financing via foreign currency.

Opportunity Cost of Investment

Opportunity cost of investment refers to the potential gains or return on investment that an investor misses out on when making a choice to invest in one place. Investment in practice is inherently driven by fear of missing out (FOMO). Markets often tend to grow in bubbles, as the mainstream of investors follow the path of successful early adopters of a given trend.
It is important to examine potential returns from the lens of an investor who has their head on a swivel, FOMO driving them to constantly compare the returns of their present investments with the best returns available to them. Diasporans are presumed to have a bias towards their home country. However, Zimbabweans - unlike many other African Diasporan communities, most notably Nigerians - tend to integrate when abroad rather than segregate. Native English-speaking, high levels of education, a relatively small home population, disaffection/hopelessness about economic prospects in Zimbabwe, and a lack of pre-colonial cultural blueprints to drive community-building while abroad are all factors that lead to many Zimbabweans to embrace citizenship abroad (source).
This is all to say that the loyalty of Diasporans to invest their dollars in Zimbabwe should not be assumed, and that 2nd generation Diasporans and beyond will look at investment in Zimbabwe with very little sentimentality, instead judging it strictly in terms of potential returns.
To provide a sense of this calculus, we can compare outcomes across several major asset classes (equities and real estate, to start) between Zimbabwe and several popular foreign direct investment destinations. Starting with equities, we can map a clear comparison between the Zimbabwe Stock Exchange, S&P500, and Japan’s Nikkei 225

Investment Returns since January 2018

Nikkei 225
Interestingly, over the course of the 2 and a half years since the Zimbabwe Stock Exchange (ZSE) came online, the ZSE All Funds Index has dramatically outperformed the S&P500, Strait Times Index and the Nikkei 225. There is a strong argument to be made that the ZSE is in firm bubble territory as stocks are among the only inflation hedges available to the average household who wealth is held primarily in ZWL (source). That being said, the central banks in both the US and Japan are pursuing monetary strategies that similarly push those holding cash to invest in equities to outpace inflation.
If we account for inflation (as measured by Consumer Price Index), Zimbabwe’s equity returns still outperformed those in the US, Singapore and Japan, although only by a few percentage points.
Real Returns
We can also compare real estate asset outcomes (via median value for single family homes), this time from 2016 to 2021, a 5 year period;

Real Estate Returns since June 2016

Real Returns
Here we can see that real estate in Zimbabwe flouts the central economic truism of real estate - that it is a strong hedge against inflation because of the expectation that housing either maintains value or increases over time. Instead, we see a near 100% loss if we adjust for inflation.
Reserve Bank of Zimbabwe Key Interest Rate
Looking at RBZ’s key interest rates (raised to 60% as of October 27) and the overall lack of formal sector lending activity, one can surmise that the government debt monetization of ZWL is effectively crowding out not just business borrowers, but also household borrowers. As of August, the average minimum bank lending rate was 41.06%(source) and average upper rate was 85% (source), a spread from the central bank key rate of 1.06% at the low end and 45% at the upper end as of August. Bank lending rate will certainly shift upwards following the RBZ’s October hiking of key interest rates. Bank deposit rates are at 26% (source) - essentially meaning that savings get aggressively devalued and depositors are essentially forced to use equities as the only place they can passively experience positive real returns.
The significant stock market returns at the same time as negative growth of real estate prices also reaffirms the theory that housing demand is suppressed due to lack of access to capital, and lack of labor income across the board for potential buyers to pay in cash. Large stock returns absent of positive returns in either real estate or bonds, absent of consistent GDP growth, and concurrent with triple digit inflation growth suggests an unsustainable equities bubble as few companies listed on the exchange have actual balance sheets or even long term market prospects to justify the valuation growth. As hyperinflation is poised to continue, one would expect investors with large positions in the ZSE able to move funds offshore to start profit taking in the near term.

Ease of Doing Business

The final key quality of an economy highly sought after by investors is overall ease of doing business. This can be defined across several qualitative measures
The World Bank’s Ease of Doing Business Ranking is a comparative global index that looks at how countries are relative to each other. There are 190 countries evaluated, and as of the most recent ranking Zimbabwe was placed at 140 (source), still among the bottom 25%, but decidedly better than it’s worst position of 171 back in 2011(source).
The overall Ease of Doing Business ranking is a composite of 10 topics that cover specific components of doing business.
Zimbabwe ranks among the 25 worst countries in terms of ease of starting a business as well as access to electricity.
The former is due to a number of factors including:
  • Number of steps in the business formation process (2x more steps than the OECD average)
  • Overall length of time to complete the formation process (3x longer than the OECD average)
  • Exhorbitant cost (76% of Zimbabwe’s per capita income)
The latter is a particular concern due to the very close relationship between economic growth and electricity capacity in emerging growth economies(source). Zimbabwe’s chronic lack of electricity supply and ageing infrastructure work to provide a thick glass ceiling for overall economic growth capacity(source).
Zimbabwe also ranks among the bottom 25 worst countries in the enforcement of business contracts, due in large part due to the high cost of litigation (costs average 83% of claim value), the lack of courts specific to commercial law/litigation, and the complete lack of electronic documentation, filing, or records keeping.
A common theme across the board is Zimbabwe’s lack of use of any electronic filing or documentation systems, requiring everything to be done by pen and paper, and for many steps in-person wet signatures. For Diasporans living in OECD countries (where the vast majority of the $150B+ total Diasporan wealth is held), the lack of digitization will be jarring. For Millennial age Diasporans and younger who are complete digital natives, the lack of modern tools - which makes trivial activities in countries like the US, UK, and China orders of magnitude more expensive and time consuming - may preclude attempts to do business in the country altogether.
Alongside being completely paper-based, Zimbabwe’s low ranking is largely down to a lack of modernization in day-to-day bureaucratic operational efficiency. Various regulatory or licensing processes require an unnecessarily high number of steps and fees to be paid, which result in lengthy waits to complete approval processes. There does not appear to be a tradeoff of improved business outcomes, environmental protection, or any other measurable objective to justify the bureaucratic inefficiency.
While Zimbabwe has been slowly climbing up this ranking (which has been discontinued by the World Bank), the specific factors behind the low rankings within the 10 composite factors require significant structural changes to both the bureaucracy that handles commercial administration and law as well as the technology infrastructure to support their work.