Momentous events in Zimbabwe during the last two years inspired hope among many Zimbabweans that they would experience meaningful political change and sustainable economic growth in their lifetimes. In November 2017, former President Robert Mugabe—who ruled Zimbabwe for nearly 40 years—was ousted in a military coup and his former deputy President Emmerson Mnangagwa was installed as head of the transitional government and continues to rule today. Unfortunately, despite this change in the country’s leadership, the people of Zimbabwe continue to face pressing challenges, including political repression, hard currency shortages, power-cuts, an inadequate fuel supply, and spiraling retail prices. Is there room for optimism? Swift action is necessary on the key issues discussed below to make President Emmerson Mnangagwa’s promise that Zimbabwe is “open for business” a reality.

Political environment

Following the coup that ousted former President Mugabe, general elections to elect a new President and members of both houses of Parliament were held at the end of July 2018. The elections were peaceful, and had a 75 percent voter turnout. ZANU-PF, President Mnangagwa’s ruling party secured 50.8 percent support. Soon after the elections, demonstrators took to the streets claiming that the election results were a sham. They were shot by the Zimbabwean military with live ammunition, resulting in six deaths and dozens of injuries. Media and electoral observer reports subsequently confirmed that the general election, like elections during President Mugabe’s reign, were not free and fair. Observers from both the European Union and U.S. reported that there was voter intimidation, some of which was by the military at the direction of ZANU-PF.

Nelson Chamisa, the leader of MDC Alliance (Zimbabwe’s official opposition) challenged President Mnangagwa’s election victory in Zimbabwe’s Constitutional Court. The court dismissed Chamisa’s challenge, confirming President Mnangagwa’s election victory. Subsequently, Zimbabwe experienced several months of protests over inflation, currency depreciation, and the high costs of basic goods. In January, the government doubled the price of gasoline, leading to riots and a brutal crackdown by the military. On January, 22 2019, the Zimbabwe Human Rights Commission condemned President Mnangagwa’s government for deploying the military to enforce law and order in the country, and for allowing the military to use excessive force and military-style torture in the process. President Mnangagwa has called for a “national dialogue” and has promised to investigate the brutal crackdown.

Against this backdrop, Zimbabwe is facing significant and complicated economic woes, many of which have festered for decades.

Economic woes

Zimbabwe sought to court international investors after the fall of Mugabe with its “open for business” slogan and many potential investors were hopeful that an economic revival would flourish in Zimbabwe under Mnangagwa’s new Administration. New investments are slow, however, for three primary reasons: (i) sanctions; (ii) indigenization policies; and (iii) currency convertibility and repatriation.

Sanctions

Several western countries have imposed sanctions on Zimbabwe since 2002, largely because of human rights abuses and political repression. The U.S. imposed sanctions on Zimbabwe with effect from March 7, 2003 through a George W. Bush-issued Executive Order. Currently, there are U.S. sanctions on 141 entities and individuals, including President Mnangagwa.

Following the ousting of President Mugabe, many African leaders, including South Africa’s President Cyril Ramaphosa, called for the sanctions imposed on Zimbabwe to be lifted. However, in March 2019 President Donald Trump extended U.S. sanctions for an additional year on grounds that the new government’s policies continue to pose an “unusual and extraordinary” threat to U.S. foreign policy noting that the sanctions will remain in place until Zimbabwe’s laws restricting media freedom and allowing protests are changed.

Early in June 2019, the European Union, which initially imposed sanctions in 2002 but only continues them on Grace and Robert Mugabe and one defense company, kicked off political talks with the Zimbabwean government. Those talks, which are focused on economic development, trade, investment, rights, rule of law and good governance, could culminate in EU sanctions on Zimbabwe being lifted.

Indigenization Policies

Zimbabwe passed the Indigenisation and Economic Empowerment Act (IEEA) in 2008. The IEEA has been a source of consternation for foreign investors. The law limited foreign ownership interest in local businesses to 49 percent, thereby compelling foreign investors who wholly owned local businesses to dispose of no less than 51 percent of their equity interest in those businesses to Zimbabwean nationals. Divergent interpretations and inconsistent application of the law created uncertainty for investors. Amended in 2017, the law now only applies to equity investment interests in diamonds and platinum. It is a positive step in the right direction that the IEAA no longer applies to business interests in other minerals or other sectors of the economy.

Currency and economy

Zimbabwe adopted the RTGS (or real-time gross settlement) Dollar as its official currency in February 2019 as a “substitute” for the bond note. The bond note was introduced as the country’s official currency in October 2016. Upon launch, the bond note was pegged at par to the US Dollar; however, the bond note lost value rapidly and was trading at a huge discount to the US dollar. The RTGS Dollar was meant to serve as an interim measure to end the so-called “dollarisation” of the economy. The RTGS Dollar is represented by RTGS balances (i.e. bank balances and mobile money wallet balances), together with the physical bond notes and coins.

Unlike the bond note, the RTGS Dollar has been made subject to market forces, but like the bond note, the market rejected the RTGS Dollar causing it to rapidly lose value. The RTGS Dollar has no convertibility, and limits placed on investors’ ability to convert their RTGS Dollar reserves into US dollars has increased black market speculation. This ultimately caused the Zimbabwean government to outlaw the use of US dollar and other foreign currencies as legal tender effective June 26, 2019.

Inflation in Zimbabwe is a 10-year high of 75.86 percent, while fuel hikes in recent months have been in excess of 100 percent.

Knock-on implications

Zimbabwe’s political woes weigh heavily on the country’s economy. While the EU appears to be laying the groundwork for a normalization of relations, U.S. sanctions will remain in place for at least the next year. As long as these sanctions are in place, the country’s ability to attract substantial levels of foreign direct investment from responsible investors will be hampered. This in turn will limit the country’s growth prospects and exacerbate the country’s economic and financial challenges.

This post can also be found on CovAfrica, the firm’s blog on legal, regulatory, political and economic developments in Africa.