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The Opportunity to Remove Barriers
Overall, there are significant barriers to widespread Diasporan investment that will remain for the foreseeable future without considerable change in a number of areas of fiscal and monetary administration. That being said, these are not insurmountable problems. Encouragingly, they provide opportunities for the government to rehabilitate its relationship with Diasporans by soliciting the considerable Diasporan expertise in law, finance, and entrepreneurship to help collaboratively structure frameworks for future investment.

Required Elements for Diasporan Investor Confidence

Of the four key qualities essential for investor support, Government Trustworthiness represents the first step in bringing Diasporan investors back to the table. Without trust in governing processes and institutions, making improvements to liquidity, investment returns, and ease of doing business are impossible because investors will not put their money in a system they do not trust.
At the same time, Zimbabwe’s economic challenges run very deep. And it is not reasonable or viable to expect government to fix them prior to Diasporans re-engaging. Indeed, government needs the diverse experiences and educational backgrounds of Diasporans as inputs to begin to effectively change the economic narrative of the country.
Further, change needs not be drastic overnight. What is needed is good faith engagement by government and truthful dialog rather than excuse-driven propaganda or empty slogans. Much of the Diaspora are highly educated, high-contribution citizens in countries with far greater economic success than Zimbabwe. And are essentially the only capital-wielding participants in the global financial system who have a bias towards investing in Zimbabwe.
Other nations that are as heavily dependent on Diasporans as Zimbabwe - such as Israel - place an incredibly high premium on being culturally and economically connected with their Diaspora. They work to remove any friction that exists preventing Diasporans from accessing benefits of citizenship and having a meaningful financial stake in the home economy.

Consular Ties

The first and most important step that can be taken is the re-investment by government into consular relationships in key countries with large Diasporan populations. Consular offices can and should act as conveners for local investment communities, and need not be formal positions on government salaries. Instead, they can and should be part of an independent institutional layer that supports official embassy functions such as engaging/participating within broader business community conversations
  • Example 1 - a number of countries have heavy consular presence in both New York City and San Francisco, the two major homes of investment capital in the United States. Informal and formal consular functions should involve connecting Zimbabwean businesses with capital in these types of markets as well as connecting local, Diasporan-owned businesses within these ecosystems to relevant opportunities in Zimbabwe
  • Example 2 - engaging directly with Diasporan youth via culture-building programs to help connect them with Zimbabwean culture. The Ministry of Diasporan Affairs, alongside the local embassy, can work with private tourism businesses to help organize (apolitical) “heritage” tours of Zimbabwe, bringing youth to key sites in Zimbabwe’s history and in the process helping Diasporan youth with primary citizenship outside of Zimbabwe obtain Zimbabwean passports and/or citizenship.
Informal consular functions that are part of an independent layer of institutions are critical, in recognition of the low current level of trust and credibility the government has among a majority of Diasporans. Here, government is a partner and a ready resource for Diasporans - providing support for essential functions like visas and citizenship documentation - but ultimately follows the lead of the Diasporan business community in each country being served by these consular functions. The excellent work of Mr Douglas Munatsi and the team at ZIDA is a great example of how this kind of service can be implemented and delivered, with great attention paid to prompt response to inquiries in line with the experience of citizens in so-called first world countries.

Modernizing Operations

The government’s lack of electronic recordkeeping or digital processes for things like passport requests, business formation or enforcement of business contracts presents a critical limitation to Zimbabwe’s ability to be globally competitive as an investment destination. The requirement of manual processes and wet signatures significantly slows the business cycle. Zimbabwe is neither a global or even regional business hub nor is it well situated geographically along major trade routes. The requirement of in-person presence for basic administrative processes that are significantly slower than in developed countries all create major disincentives for not only Diasporan investment in general, but for resident Zimbabweans who leave the country by the tens of thousands each year seeking better economic opportunities.
On the other hand, digitization of these kinds of functions represents a non-trivial lift. Not only are there up-front capital costs in terms of software licensing and initial implementation, but there are also costs associated with transitioning existing manual processes to software-supported processes that include things like training, technical support, and ongoing data management.
This is all to say that modernization is something that is executed in stages, according to a long-term roadmap. High priority pain points should be addressed first, with other functions less impactful to the ease of doing business transitioning in later stages. The following functions would be considered critical for initial digital transformation:
  • Registration of business entities
    • Submitting required documents electronically
    • Electronic signatures for Articles of Organization and Memorandum of Association
    • Online portal for tracking application progress
    • Rapid registration for Tax ID (in the US, registration with the IRS along with generating a Tax ID can be done in completely automated manner within 10 minutes)
  • Passport or citizenship registration
    • Submitting required documents electronically
    • Online portal for tracking application progress

Decentralized Finance

Empirical evidence of economic success stories in both the 20th and 21st centuries strongly suggests that liquidity is the foundation of economic growth. Without liquidity - from the standpoint of frictionless transactions/high money velocity and the standpoint of market demand for government debt - economic growth and currency stability are both impossible. Zimbabwe will remain in a low growth debt trap, unable to raise sufficient capital to fund key infrastructure projects or to make financing widely available to the private sector. The lack of foreign currency reserves also means that providing collateral for sufficiently large public debt offerings will also be a challenge - and that is without even touching on the high rates of interest involved.
Here, the government’s current stance of attempting to force utility of the ZWL (in spite of negligible market demand for the currency) via tight restrictions on the use of forex, which include an official USD-ZWL exchange rate that trades ZWL at a significant premium over its actual market value, will continue to actively discourage foreign investment. The RBZ’s track record of managing inflation is notoriously poor, and even now, inflation is such that even real estate is experiencing negative real returns.
Decentralized finance offers an effective solution to both the lack of liquidity available for private sector capitalization and the overall lack of investor trust in the government’s economic policy transparency and the RBZ’s centralized management of currency.
The term decentralized finance, or DeFi for short, describes a financial system that operates without the need for traditional, centralized intermediaries. Traditional finance has everything going through a bank and other financial institutions like a global exchange, but DeFi creates a system that can function on its own.
The most well-known application of decentralized finance is online transactions through DeFi cryptocurrency, and in general decentralized finance allows us to handle a number of financial applications – like investing, insurances, exchanging, borrowing, and lending in a more efficient and transparent way.
Rather than a bank facilitating transactions and services between parties, DeFi uses technology. A number of open-source protocols are being developed alongside public blockchains, forming a framework for decentralized finance to operate on.
There are two core components that allow a finance system to work; it needs an infrastructure to operate on, and a currency to operate with. In a centralized system, banks and financial institutions act as that infrastructure, while fiat money, like the US dollar, acts as currency. Decentralized finance offers alternative components to offer a full range of financial services. The primary component is a blockchain.
A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger. The decentralised database managed by multiple participants is known as Distributed Ledger Technology (DLT).
A secondary component are smart contracts, built onto the blockchain. Smart contracts are functionally similar to paper contracts, except that the information contained within it is digital. There are many applications and uses for smart contracts, plus many benefits including:
  • Self-verifying agreements due to the ability to set automated parameters.
  • Contracts that are self-enforcing when all parties involved meet all criteria (these could be dictated by financial markets, for example).
  • Secure data that is encrypted, and cannot be tampered with or altered.
  • Transactions that can be carried out quickly, in any country in the world, with the same level of security as cryptocurrencies.
  • The ability to store secure and sensitive information, such as personal details, domain registration, membership records, etc.
  • Terms and conditions within a contract that cannot be disputed once established, making smart contracts reliable.
  • All computers involved in the smart contract updating their ledgers accordingly once the contract has been initiated, changed, or revised. All parties involved are also kept simultaneously updated.
In order to create a reliable, secure decentralized finance system, you need a stable currency. Most blockchain systems like Bitcoin or Ethereum have their own native cryptocurrencies. However, while these currencies are incredibly viable stores of value and have strong valuations relative to even the strongest fiat currencies like the US dollar, their pricing is highly volatile. This volatility makes them unsuitable for day-to-day financial transactions. Instead, stablecoins can be used directly on most existing blockchain networks. A stablecoin is a cryptocurrency that matches its value with a fiat currency. Currently, there are a number of stablecoins with market capitalization comparable to the total GDP of Zimbabwe, and include USDC ($33B), Gemini ($39B), and DAI ($6B) - all of which are pegged 1:1 with the US dollar. Stablecoin holders can stake their coins to earn annual interest (APY) at rates significantly higher than the prevailing rate of inflation of the US dollar, making them viable savings instruments as well.
Decentralized finance via blockchain can provide high velocity liquidity via the following functions
  • Decentralized borrowing and lending
    • Peer-to-peer systems of borrowing and lending stablecoins, allowing lenders alternative paths for generating returns and borrowers a much lower bar for accessing capital, at low costs as well. Loan contracts are built as smart contracts, with automated execution and terms enforcement.
  • Decentralized insurance
    • Peer-to-peer insurance allows asset owners to connect with anyone around the world who is willing to insure the assets in stablecoin-denominated terms, and likewise local Zimbabwean businesses can insure assets of peers around the world. Terms are executed and enforced via smart contract, making management and claims payouts seamless
As stated earlier, the lack of government trustworthiness is the fundamental barrier to Zimbabwe’s ability to attract foreign investment of any kind - Diasporan or not. Trust, once broken, is not something that can be repaired through declarations of being “open for business.” It can only be repaired by costly signals that demonstrate trustworthiness.
Another critical stumbling block in attracting investment is continual hyperinflation. The current policy focus of leveraging tight forex controls as a means of building government foreign currency reserves and simultaneously monetizing government debt is a key factor in the most recent spate of hyperinflation - and these activities not only decrease competitiveness of local investment returns across all asset classes, but also serve to limit the ability of the private sector to access needed financing.
Decentralized finance helps address both of these critical barriers. Instead of asking investors to simply trust that a government that historically has offered loose enforcement of property rights and is pursuing monetary policy that cannibalizes investor principal has their best interests in mind, systems of decentralized finance remove the question entirely. Now what is trusted is an already tried-and-tested protocol and system of smart contracts that are not only freely available to see, but also market participants can play an active role in developing the code base.
Another key benefit specific to cryptocurrency as an asset class is the fact that virtually all currencies (including the US dollar, British pound, Chinese yuan and the Euro) are experiencing significant levels of devaluation as their issuers are all engaging in historic levels of money supply increase combined with debt monetization and near zero key interest rates in an effort to stimulate their economies following COVID-19 driven recession. Early cryptocurrency holders, alongside now institutional investors, are looking at currencies like Bitcoin as a passive store of value as an alternative to the ultra-low deposit rates in savings accounts or the below-inflation yields of short term treasury debt. The government’s exploration of cryptocurrency trade on the Vic Falls Exchange is encouraging - allowing for the integration of cryptocurrencies into the Zimbabwean economy will enable both residents and investors access to stable, inflation-protected assets that can be collateralized and used to capitalize business ventures.
Additionally, decentralized cryptocurrency exchanges - along with clear policies recognizing the rights of cryptocurrency mining - allow for the government to build foreign currency reserves in a manner that does not cannibalize investor principal or force market participants to immediately lose value on foreign currency they bring into the economy. By licensing and appropriate taxation on cryptocurrency mining, the government can quickly build cryptocurrency reserves. The widespread institutional adoption of cryptocurrency among major asset managers, including pension funds and sovereign wealth funds, across the global financial world means that crypto reserves would provide the Zimbabwean government access to financing on much better terms than presently available. This would open up the ability to raise public debt (such as a Diaspora bond) through decentralized finance channels directly, or through institutional investors, in either case being able to leverage cryptocurrency reserves as collateral.
Example of proposed DeFi lending system that can be implemented in Zimbabwe to enable both public and private sector capitalization