US embassy cable - 05HARARE168

UNCLAS SECTION 01 OF 07 HARARE 000168 
 
SIPDIS 
 
STATE FOR OFFICE OF INVESTMENT AFFAIRS - EB/IFD/OIA 
 
E. O. 12958: N/A 
TAGS: KTDB, EFIN, ECON, ETRD, EINV, PGOV, ZI, Economic Situation 
SUBJECT:  INVESTMENT CLIMATE STATEMENT - ZIMBABWE 
 
 
1. The Zimbabwean economy remains very weak, making it 
unlikely to attract or absorb signficiant foreign direct 
investment (FDI) in 2005.  In recent years, FDI has been 
less than US$10 million annually, down from US$300-500 
million in the mid-1990s.  As we note in the more extensive 
Country Commercial Guide (septel), foreign investors will 
find few if any sectors appealing at this time.  In many 
industries, wage inflation has made Zimbabwean workers as 
expensive as those in South Africa.   The overvalued 
official exchange rate diminishes the buying power of 
foreign investors in Zimbabwe and it renders most of the 
country's exports uncompetitive.  In addition, the 
country's political crisis has harmed the rule-of-law and 
put private property at greater risk. 
 
Openness to Foreign Investment 
--------------------------------------- 
2. Zimbabwe is generally unwelcoming to foreign investment, 
particularly from Western countries.  Nonetheless, about 25 
U.S. multinationals maintain subsidiaries in the country, 
largely holdovers from better years in the recent past. 
Many others, such as Caterpillar and Microsoft, sell their 
products through licensed dealers.   The Government's 
official and oft-enunciated policy is to favor FDI from 
Asian countries, particularly from China and Malaysia. 
 
3.  The Government's guidelines for foreign investors are 
found in the volume, "The Promotion of Investment: Policy 
and Regulations," commonly referred to as Zimbabwe's 
"Investment Code."  It has two dominant themes: a) 
recognizing that foreign capital has played an important 
role in Zimbabwe's development, but b) stressing that 
Zimbabweans should participate more fully in the country's 
economy.  Accordingly, it notes that the Government prefers 
majority Zimbabwean participation in new investment 
projects and specifies that the degree of local ownership 
will be a prime criterion in the evaluation of investment 
proposals.   This bias toward local control has grown since 
2001. 
 
4. The Government will consider majority foreign ownership 
in high-priority projects, but will also encourage 
arrangements for the eventual transfer of majority control 
to Zimbabwean interests.  It has often been Government 
practice to take part in new investments by entering into 
joint ventures with private or domestic investors in 
strategic and basic infrastructure projects.  However, 
given the Government's cumulative deficit and resultant 
capital shortage, this type of activity is moribund at 
present.  Regarding privatization of Zimbabwe's parastatal 
companies, progress has been very slow since the Government 
identified it as a priority in the mid-1990s, with only 
about six out of the 57 earmarked organizations making the 
transition.  Moreover, arguments about the allowable extent 
of foreign investment, retention amount for indigenization, 
pricing and means of offering have yet to be clearly or 
transparently resolved. 
 
Conversion and Transfer Policies 
---------------------------------------- 
5. Zimbabwe is currently experiencing an acute hard 
currency shortage that, among other things, has caused fuel 
shortages, default on sovereign debt, shortages of imported 
goods and components, and a sharp decline in industrial, 
agricultural and mining operations.  The Foreign Exchange 
Control Act does not prohibit foreign investors from moving 
assets between Zimbabwean and foreign accounts, but it does 
require accommodation exchange at a fixed, artificially low 
rate. 
 
6. The Foreign Exchange Control Act extends to prospective 
outward investment, as well as dividend remittances. 
Relatively few Zimbabwean firms have made investments 
outside the country, and most of these are in neighboring 
nations.  Traditionally, investment by Zimbabweans outside 
their country has been something of a sore point with the 
Government, which suspects, often correctly, that companies 
may actually be simply relocating from Zimbabwe.  A case in 
point is a number of textile manufacturers who relocated to 
Botswana a few years ago in order to take advantage of that 
country's easy access to imports and foreign exchange for 
the purpose of exporting back into Zimbabwe. 
 
Expropriation and Compensation 
---------------------------------------- 
7. Zimbabwe's constitution prohibits the acquisition of 
private property without compensation.  Nonetheless, the 
Government has sanctioned land invasions by "war veterans" 
and other "settlers" since 2001 and the Parliament approved 
in April 2000 Constitutional Amendment No. 16, which 
authorized the compulsory acquisition of privately owned 
commercial farms with compensation limited to the 
improvements made on the land.  Additionally, over the past 
few years the President and other officials have made 
periodic statements indicating that the Government may next 
target the mining sector and/or manufacturing sector for 
similarly forced indigenization.  It remains to be seen 
what parameters and compensation standards will be followed 
if this objective is acted upon.  Needless to say, any 
potential foreign investors should take into account the 
risk of uncompensated expropriation 
 
8. Land redistribution has long been recognized as a 
necessary step to redress colonial injustices, create long- 
term stability and enhance economic participation by 
citizens in Zimbabwe.  However, the current program fails to 
achieve these goals.  In many instances, prime properties 
went to ruling party cadres.  In other instances, the 
resettled peasant populations lack the infrastructure, 
training, skills and resources to utilize the land they have 
been given.  Worse still, virtually no farm laborers, who 
would have at least had adequate training and skills, have 
received any land, and there has been neither transparency 
nor an orderly strategy to maintain production. 
 
9. The Government's program to seize largely white-owned 
commercial farms without either the intention or the funds 
to compensate the title holders has raised serious 
questions about respect for property rights and the rule of 
law in Zimbabwe.  Besides the fate of the country's largest 
export producing sector, Zimbabwe's food self-reliance has 
fallen dramatically, affecting the entire economy.  As part 
of this program, the Government has seized for 
redistribution a number of farms and conservancies 
belonging to American citizens and other foreign investors. 
Most of these property-owners held Zimbabwe Investment 
Center approval certificates and purchased their land after 
Independence in 1980.  Despite former repeated U.S. 
protests, the Government has not addressed these extra- 
judicial expropriations. 
 
Dispute Settlement 
----------------------- 
10. In the event of an investment dispute (excepting the 
current fast-track land reform program), the Government of 
Zimbabwe agrees in theory to submit the matter for 
settlement by arbitration, according to the rules and 
procedures promulgated by the United Nations Commission on 
International Trade Law (UNCITRAL), once the investor has 
exhausted the administrative and judicial remedies 
available locally.  We are not aware of investors who have 
resorted to this option. 
 
11. To increase investor confidence, the Government has 
also acceded to the 1965 convention on the settlement of 
investment disputes between states and nationals of other 
states, and to the 1958 New York convention on the 
recognition and enforcement of foreign arbitral awards. 
Until recently, Zimbabwe's judiciary enjoyed a well- 
deserved reputation for fairness and independence. 
However, recent Government efforts to intimidate the 
judiciary and suspect new appointments to the bench have 
raised serious concerns in this area.  Additionally, during 
2002 many political heavyweights -- including the 
Zimbabwean president -- have publicly announced that they 
have no intention of honoring court orders if they are not 
politically acceptable to the ruling party. 
 
Performance Requirements and Incentives 
--------------------------------------------- ------ 
12. Several tax breaks are available for new investment by 
foreign and domestic companies.  Capital expenditures on 
new factories, machinery and improvements are fully 
deductible and the Government waives import tax and surtax 
on capital equipment.   Other incentives for investors 
include: 
 
- Investment allowance of 15 percent in the year of 
purchase of industrial and commercial buildings, staff 
housing and articles, implements and machinery 
 
- Investment allowance of 50 percent in the year of 
purchase for training, buildings and equipment 
 
- Twenty-five percent special initial allowance on cost of 
industrial buildings and commercial buildings and machinery 
in growth point areas is granted as a rebate for the first 
four years 
 
- Special mining lease provisions entitle the holder to 
specific incentive packages to be negotiated with the 
Ministry of Mines. 
 
- The Government also has provided for the refund of sales 
taxes (15 percent) for capital goods purchased in Zimbabwe 
and intended for use in priority projects or investment in 
growth points. 
 
13. Import duties (the reduction of which had been under 
discussion with both the IMF and the World Bank) and 
related taxes range up to more than 100 percent.  Any 
investment proposal that involves the employment of 
expatriates must present a strong case for doing so in 
order to obtain a work and residence permit.  Normally, the 
maximum contract period for an expatriate is three years, 
but this will be extended to five years for expatriates 
with highly specialized skills.  Expatriates who have prior 
permission from the Reserve Bank's exchange control 
department will be permitted to remit one-third of their 
salaries.  We are aware of several instances since 2003 
when the Government has refused to renew the visa of a non- 
Zimbabwean executive at a subsidiary of a multinational. 
 
14. There are no general performance requirements. 
Official policy, however, especially welcomes investment in 
enterprises that contribute to rural development, job 
creation, exports, use of local materials, and transfer of 
appropriate technology.  There are no discriminatory import 
or export policies affecting foreign firms, although as 
noted earlier, the Government's approval criteria are 
heavily weighted toward export-oriented projects, 
especially from foreign investors. 
 
15. Joint ventures are very strongly encouraged.  While 
official policy supports "the maximum Zimbabwean 
participation" in any new investment project, no specific 
requirements for local participation have been defined. 
However, experience has shown that 30 percent local 
participation is a widely accepted benchmark minimum. 
Foreign investors are expected to provide for domestic 
equity participation at or prior to startup, and can expect 
to be approached early on by a wide range of potential 
partners, with some Government officials desiring shares at 
no cost.  Companies are expected to make maximum use of 
Zimbabwean managerial and technical personnel.  Subject to 
Reserve Bank approval, foreign companies are allowed to 
provide capital equipment as an equity contribution to a 
joint venture. 
 
16. The Government of Zimbabwe's policy calls for 
Government participation in new investments in "strategic" 
industries such as energy and mining.  The terms of 
Government participation will be determined on a 
case-by-case basis.  However, the Government's lack of 
funds (the cause of the dearth of new major investment 
projects), means that this policy has not been tested in 
practice for some time. 
 
 
Right to Private Ownership and Establishment 
--------------------------------------------- ----------- 
17. Although Zimbabwean law guarantees the right to private 
ownership, the Government has frequently seized property 
without due process.  Since 2001, the Government has 
stripped about 4,000 of 4,500 white commercial farmers of 
their deeded land without compensation.  Many of these 
farmers were foreigners who held Zimbabwe Investment Center 
certificates and were nationals of countries with which 
Zimbabwe has signed bilateral investment treaties.  In 
virtually all cases, the Government has ignored these 
certificates and treaties.  There is a lingering threat that 
the Government could also expropriate property belonging to 
foreign firms for the purpose of transferring ownership to 
black Zimbabweans. 
 
Protection of Property Rights 
----------------------------------- 
18. We cannot emphasize enough the real risk of 
expropriation.  The Government has a strong desire to 
control as much of the economy as possible.  There is 
little political will to pursue needed reforms such as 
privatization of state-owned companies, liberalization of 
foreign exchange policies and removal of price controls 
from food, staples and energy.  The local ownership 
requirement and the large areas of the economy where 
foreign investment is not allowed are other hindrances to 
business establishment and free cross-border capital and 
equity flows.  For private firms, 
 
19. Since independence, Zimbabwe has applied international 
patent and trademark conventions.  It is a member of the 
World Intellectual Property Organization.  Generally, the 
Government seeks to honor intellectual property ownership 
and rights, although there are serious doubts about its 
ability to enforce these obligations.  The Embassy is not 
aware of any grievances over such issues, although pirating 
of videocassettes and computer software is common. 
Remittances for royalties, technical services and 
management fees have been suspended by many companies with 
overseas ties, due to the severe hard currency shortage. 
 
Transparency of Regulatory System 
------------------------------------------- 
20. The Government has established only a few regulatory 
bodies.  When it resumes its long-dormant privatization 
program, it is expected to bring more regulatory agencies 
into being. 
 
21. Official policy is to encourage competition within the 
private sector.  The Government claims to be concerned 
about an "over-concentration" of market clout among a few 
companies in several industries.  However, a greater threat 
is that many bureaucratic functions in this still heavily 
controlled economy are not transparent and corruption 
within the regulatory system is increasingly worrisome. 
There are, however, still some regulators who generally 
perform their functions, though their numbers dwindle each 
year. 
 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- -------------- 
-- 
22. New portfolio investment in Zimbabwe has been very 
limited in recent quarters as the country's macro-economic 
outlook and fundamentals continue to decline.  Zimbabwe's 
stock market (about 80 companies listed) is small, trading 
is quite thin, and the public stock float of many of the 
smaller companies is closely held.  In September 1996, the 
Government opened the stock and money markets to limited 
foreign portfolio investment.  Since then, a maximum of 40 
percent of any locally listed company can be foreign-owned 
with a single investor acquiring a maximum of 10 percent of 
the shares on offer.  Foreign participation in the bond 
market is restricted to the primary market and only 35 
percent of invested capital may be placed in bonds.  The 
equity market is the major opportunity for foreign 
investors. 
 
23. Zimbabwe's financial sector is quite large and well- 
developed.  An impressive variety of financial instruments 
are traded, though thinly, including debentures, private 
sector bonds, bankers acceptances, treasury bills, 
municipal and utility bonds.  Two major international 
commercial banks and a number of regional and domestic 
banks operate with over 200 branches total.  The merchant 
banks are quite sophisticated and agile.  However, the well- 
publicized failure of a number of financial institutions, 
primarily due to fraud and inept management, has raised 
concern over the oversight capability of the Reserve Bank 
and the financial soundness of a number of the smaller 
players. 
 
Political Violence 
--------------------- 
24. Since the Government's loss in a February 2000 
constitutional referendum, ruling party supporters of the 
Government have systematically attacked members of the 
opposition Movement for Democratic Change (MDC) and anyone 
suspected of supporting them.  In the months preceding the 
June 2000 parliamentary elections and the March 2002 
presidential election, the political violence intensified 
and ruling party supporters, including liberation war 
veterans and Government-trained militia, perpetrated 
widespread abuses and killed more than 150 people. 
Political repression of dissenters, and non-Governmental 
organizations remains substantial, although the Government 
seems to have loosened up on media restrictions during 2004 
and recorded levels of political violence declined sharply 
during the year. 
 
Corruption 
------------- 
25. According to anecdotal evidence and a survey conducted 
by Transparency International-Zimbabwe, corruption, already 
at high and chronic levels, is increasing, especially 
within the Government.  Many companies and the police do 
not have appropriate tools or skills for investigating and 
checking the corruption, though the legislative and 
criminal law framework exists (for example, acceptance of 
bribes is a criminal offense).  Several U.S. firms have 
protested problems involving major Government tenders and 
the lack of transparency in the Government tender board's 
management of the cases.  Tenders in the 
telecommunications, power, defense and aviation sectors 
have been particularly notorious.  Cases involving high or 
prominent ruling party or Government officials usually do 
not reach court, regardless of the magnitude or 
egregiousness of the offense. 
 
26. Parliament has adopted a constitutional amendment that 
provides for the creation of an anti-corruption commission, 
however, to date it has not been funded or staffed.  The 
Zimbabwe Republic Police have historically been well 
disciplined.  Recent instances of show that in many 
Government entities, especially the parastatals, corrupt 
practices are widespread.  Cronyism is also a problem. 
Under fast-track land reform, the Government has awarded 
farms in party activists in a non-transparent manner.  In 
the Reserve Bank's twice-weekly currency auctions, firms 
with close personal ties to the Government often receive 
foreign exchange at preferential rates. 
 
Bilateral Investment Agreements 
---------------------------------------- 
27. The U.S. has no bilateral investment or trade treaty 
with Zimbabwe.  The country currently has bilateral 
investment agreements in force with Germany, the United 
Kingdom, Portugal, Switzerland, Sweden, Malaysia, Mozambique 
and China.  It is negotiating bilateral investment treaties 
with Italy and the Netherlands.  However, commercial farms 
covered under some of the foregoing treaties remain listed 
for acquisition under current legislation, thereby denying 
the owner benefits such as free use and full, market 
compensation that are covered in these treaties. 
 
OPIC and Other Investment Programs 
--------------------------------------------- - 
28. The Government and the U.S. Government concluded an 
OPIC agreement in April 1999.  Zimbabwe acceded to the 
World Bank's multilateral investment guarantee agency 
(MIGA) in September 1989.  Many major donor countries have 
suspended their trade finance and export promotion 
programs, as well as investment coverage, due largely to 
mounting arrears caused by Zimbabwe's recent difficulty in 
meeting its foreign debt obligations in a timely manner, as 
well as the ongoing political crisis.  OPIC currently funds 
a few projects in country. 
 
Labor 
------- 
29. As noted elsewhere in this report, there is a growing 
shortage of professional, technical and service skills in 
the workforce, caused primarily by emigration brought about 
by political and economic crises.  Despite this, Zimbabwe 
still has one of the best-educated labor forces in Africa. 
Shrinkage of the economy in recent years, and the commercial 
farm invasions in the same period, have caused formal sector 
employment to drop fairly precipitously.  With at least 
300,000 secondary school graduates or dropouts entering the 
job market every year, the unemployment rate has been 
steadily rising, and now stands at a minimum of 75 percent. 
The reduced business activity, declining profitability of 
companies, surplus labor and hyper-inflationary pressures 
have caused wage increases to lag far behind inflation.  As 
a consequence, disposable incomes and standards of living 
have drastically fallen for the majority of the formally 
employed. 
 
30. The country's HIV/AIDS epidemic, with one of the highest 
infection rates in the world, is also taking a heavy toll on 
the workforce, with the worst effects of the disease still 
to come.  The Government takes the epidemic seriously and 
has pursued policies to encourage testing, prevention and 
care.  However, in the short run, the epidemic  will almost 
certainly worsen. 
 
31. The Government largely adheres to International Labor 
Organization conventions protecting worker rights, although 
it merited a special paragraph in the ILO's annual report 
designating it as a "notorious country" for its continued 
attempts to limit workers' right to organize and hold labor 
union meetings.  The 1985 Labor Relations Act sets strict 
standards for occupational health and safety, but 
enforcement is fairly lax and not consistent throughout the 
industrial sectors.  In addition, the Government sets a 
maximum workweek and minimum wage.  The workweek averages 40 
hours, but can go as high as 60.  The law mandates a 24-hour 
rest period each week.  Although minimum wages are 
ostensibly set by the Government along sectoral lines, in 
practice there is currently no common policy.  Due to the 
hyper-inflationary situation, each sector negotiates wages 
that it can afford to pay.  Some workers are also provided 
allowances and expenses for food, transportation, and 
housing.  As already noted, wage increases have lagged far 
behind the rate of inflation (currently exceeding 300%), 
causing a critical drop in disposable income and purchasing 
power. 
 
32. One of the most sobering labor developments concerns the 
displacement of commercial farm workers.  Due to the 
disruptions on commercial farms, there are an estimated 
500,000 displaced agricultural workers in Zimbabwe.  In 
addition to having no work and no income, many of these 
laborers - and their families - now have no home.  The 
ripple affect of this displacement on the economy will 
continue to be felt for years, as will the accompanying loss 
in agricultural production. 
 
33. Labor relations have become particularly fractious 
between labor and Government in Zimbabwe since 1997, as 
economic conditions in the country have deteriorated.  They 
are less so between labor and management.  Workers negotiate 
wages and other benefits with employers during the annual 
collective bargaining season, which runs from approximately 
May to July each year.  A National Employment Council (NEC) 
in each industry, comprising representatives from labor, 
business, and Government, is the vehicle through which the 
collective bargaining takes place.  In addition, the 
Zimbabwe Congress of Trade Unions (ZCTU), the country's 
umbrella labor organization, consisting of 35 member unions 
and approximately 270,000 members, is the traditional 
advocate for workers to both business and Government. 
Through both the NEC and the ZCTU, workers in all sectors 
have demanded repeated salary increases in 2001, 2002, and 
2003 to partially compensate for the high inflation and 
increased cost of living, in some cases striking until their 
demands were addressed.  In almost all industries, employers 
have approved more than one salary hike per year in response 
to the inflation rate. 
 
34. The Government still maintains an historically 
paternalistic attitude toward labor, reserving the right to 
intervene in issues of concern in the workplace.  However, 
the high profile and politicization of the ZCTU in recent 
years has worked to limit Government's influence over 
workers.  The Government has threatened to eliminate the 
ZCTU, and has taken steps to marginalize the traditional 
unions and the formal labor dispute resolution mechanism. 
Notably, in 2000, groups of "war veterans" - using tactics 
similar to those adopted in the farm invasions - invaded a 
number of factories and workplaces, usually claiming to 
represent the interests of terminated or disciplined 
workers, but in reality attempting to extort money from 
management. 
 
35. The Government has since then sought to capitalize on 
war veteran efforts by creating the Zimbabwe Federation of 
Trade Unions (ZFTU), as an alternative umbrella organization 
to the ZCTU.  However, no one outside of Government or the 
Government-controlled media sees the ZFTU as a legitimate 
labor organization, and despite government-backed efforts, 
it has failed to dislodge the ZCTU as the voice of labor in 
Zimbabwe.  The ZCTU still remains the "official" and 
internationally recognized labor organization in Zimbabwe. 
 
Foreign-Trade Zones/Free Ports 
-------------------------------------- 
36. At the urging of western donors, the IMF and the World 
Bank, the Government promulgated legislation appointing an 
EPZ authority in 1996.  Zimbabwe now has many export 
processing zones, but since January 2004 has generally 
required that foreign capital comprise a majority of the 
investment.   A trade performance statute requires eligible 
companies to export at least 80 percent of output, a 
requirement that has limited foreign investment in the new 
zones.  Other benefits include a five-year tax holiday, 
duty-free importation of raw materials, no tax liability 
from capital gains arising from the sale of property 
forming part of the investment in designated processing 
zones, and duty-free importation of capital equipment for 
use in the EPZ. 
 
37. Under the original legislation, the provisions of the 
Labor Relations Act (LRA) do not apply within the zones. 
However, due to strong advocacy from the labor movement, 
the Ministry of Public Service, Labor and Social Welfare 
has entered into discussions with the Ministry of Justice 
to amend the act so that the LRA will apply. 
 
 
Foreign Direct Investment Statistics 
------------------------------------------- 
38. Foreign investment has played a crucial role in 
Zimbabwe's development.  However,  foreign direct investment 
in the last three years has all but dried up, as the 
Government's focus on political objectives at substantial 
cost to the economy continue and a return to better policies 
and practices seems no closer.  At the end of the 1970's, 
foreigners owned an estimated 70-80 percent of listed 
corporations.  Today, offshore ownership of shares on the 
Zimbabwe Stock Exchange has fallen to approximately 25 
percent (about 5 percent individuals, the remainder 
institutional or corporate). 
 
39. From independence in 1980 until the introduction of the 
precursor of the structural adjustment program in 1990, new 
foreign investment amounted to roughly U.S. $27 million.  In 
the 1990s, by contrast, it reached $400 million/year.  A 
survey conducted by the Confederation of Zimbabwe Industries 
(CZI) indicated that 25 percent of industrial concerns have 
some foreign ownership.  Because these include many of 
Zimbabwe's largest companies, they still account for 40-50 
percent of industrial output.  Estimates of the value of 
overall foreign investment run as high as U.S. $5 billion 
(replacement cost). 
 
Web Resources 
------------------- 
40. The Zimbabwe Investment Center (ZIC) is authorized to 
approve proposals involving any foreign investor in any 
business field.  After approval of a project, if foreign 
staffing or management is desired, the Ministry of Home 
Affairs through the department of immigration is 
responsible for the issuance of work permits for expatriate 
staff. Both initial and renewal issuance of work permits 
has, at times, proved problematic for foreign companies and 
investors. 
 
ZIC's address and contact numbers are: 
 
Zimbabwe Investment Centre 
Investment House 
109 Rotten Row 
P.O. Box 5950 
Harare 
 
Telephone: 757931/4 
Fax: (263) (4) 757937 
www.zic.co.zw