Vic Falls exchange: A wolf in wolf’s clothing.

The Zimbabwean Finance Minister recently announced that Zimbabwe would be establishing a new stock exchange in the resort town of Victoria Falls. The Victoria stock exchange (VFX) would have the primary function of operating under the auspices of an offshore financial centre with the aim of attracting foreign capital (specifically mining) and would have benefits including but not limited to being a tax haven, relaxed labour laws and easy repatriation of funds. The establishment of VFX has been received with cautious optimism from tourism and financial players, and it is unfortunate that I have to pour cold water on the party, arguing that the VFX is a wolf in wolf’s clothing, with the potential to become another centre for tax avoidance, illicit financial flows and increased the inequality in Zimbabwe.

The angelic curse that is Finance.

The financial industry is one of the most intriguing industries to work in the 21st century. Globalization, new and ever increasingly complex financial technologies ranging from derivatives to cryptocurrency have made it even more complex. You would be hard pressed to find a developed nation without a well-developed financial industry. That is because for economic growth, financing, be it through debt or equity is vital. So there is no question that finance is good, however, a lot of finance is not. In Britain, the city of London has become so large in comparison to the rest of the economy, it has hollowed out other sectors of the economy, what was brilliantly termed the “financial curse” by Nicholas Shaxson.

Closer to home, the South African and Mauritian financial sectors have grown leaps and bounds in the last three decades. Employing 3% of the working population in South Africa, the financial industry gobbled up nearly 25% of corporate profit in 2017. Mauritius has become the glowing example of a tax haven. Companies looking to run away from high taxes but operate in Africa and India have established shelf companies in Mauritius leaking much needed taxes for affected countries. All these are examples of what happens when finance squeezes profit out the real economy. The actual term is ‘financialization’ where the financial industry instead of serving the economy, the economy begins to serve the financial industry.

Zimbabwe is no stranger to financialization. Contrary to popular belief, the financial industry, namely insurance firms such as Old Mutual and First Mutual benefitted from the 2002-2008 economic downturn in Zimbabwe as proven by the Smith Commission of Inquiry. In the last 10 years, there has been a proliferation of microfinances with some charging punitive interest rates on very short term loans. They are effectively functioning as legal loan sharks trapping their clients in debt cycles. A specific form of financialization in Zimbabwe is the re-emergence of the currency black market. A combination of mobile money, local currency, and foreign currency speculation has led to thousands of vendors making money from currency speculation. It is on this back drop that Minister Ncube would like to introduce the VFX on the back of four promises; creating a tax haven, jobs, supporting the country’s balance of payments as well as attracting foreign direct Investment.

Tax haven

As already mentioned, Mauritius is a world leader in terms of accommodating tax avoidance in the world, but especially in Africa. Seychelles is another one, and Minister Ncube aims to turn VFX into one. A tax haven is basically a specific jurisdiction which allows for very low levels of tax. This will be attractive for companies that want to list on the VFX. The other side of that coin however is the tendency of tax haven nations to be conduits of tax evasion and avoidance. These support illicit financial flows from Africa which amount to double the aid that Africa gets per annum. This brings an important aspect of VFX. For it to be effective for the nation, the nation will need to have strong capacities to ensure there are no leaks. On this, Zimbabwe’s regulatory strengths are weak. VFX will turn into a legal way for firms, especially those in mining to siphon funds out of Zimbabwe. This also shouldn’t be the case. Compared to Mauritius which only has sugar as a commodity to export, Zimbabwe has numerous commodities in high demand such as platinum, palladium which allows it to have a stronger bargaining power when dealing with international finance.

Creating Jobs along the Falls

Another potential benefit of VFX is that it will most certainly create jobs in the service sectors of finance, accounting and law. I will be the first to raise my hand to the fact that Zimbabwe’s most powerful resource in the 21st century is our comparatively higher education levels especially in the aforementioned sectors. The establishment of VFX will lead to Victoria Falls resembling Cape Town where a number of boutique financial service industries are located. My worries on this come in two ways. Firstly, the finance industry drains talent from other industries, what one may call sectoral brain drain. It is not uncommon to see civil engineers working on financial algorithms. At the personal level of the engineer this will be good, but at a structural level where Zimbabwe and Africa need innovations in other industries this could lead stalling in other sectors as has occurred in South Africa and London. In addition, finance, especially finance in the 21st century does not lead to high levels of employment for less educated people who are the majority in Zimbabwe. The VFX will then become a society of a 1% sipping cocktails, working on their laptops while overlooking the Falls, a haven for inequality.

What about the ZSE?

As the finance elite sip and work on their laptops, people will point out just how much finance/investment they bring into the nation. The amount of finance that moves in and out of South Africa and Mauritius is staggering. This is the vision behind VFX. Creating a bourse that allows mining companies for example to raise cash to mine in the nation. It is similar to how Hwange Colliery was listed on the London Stock Exchange decades ago. Australian mining firms regularly list on the stock exchange to raise finance too. The first worry here is that Zimbabwe unlike most Africa nations does have a stock exchange already. The Zimbabwe Stock exchange (ZSE) is not only one of the oldest but it also has a significant number of listings, including mining entities. Creating VFX while having the ZSE is telling. It isn’t because the ZSE is too big but it is because the financial policy inconsistencies have made investors weary of investing in ZSE. But it is this weariness that will make success on VFX a problem too. With stable tax and financial policies, VFX wouldn’t be necessary because companies would simply register on the ZSE. This pours cold water on the VFX project. Instead of being genuinely for the nation’s development, it looks more like a white flag from Ncube with the aim of creating a quasi-state in Victoria Falls where investors can run away from Ncube’s disastrous economic policies, have all the benefits of precious commodities, with little return for the general Zimbabwean.

Foreign vs domestic capital.

Related to this is that there is another type of investment besides foreign investment and that is domestic investment. I do agree that FDI is not limited to finance (intellectual property, expertise etc) but a sustained focus on creating domestic direct investment (DDI) will be more beneficial to Zimbabweans. Developing the mortgage sector, making farmlands bankable, are ways in which finance can be used to fast track development in Zimbabwe. On top of that, the returns of domestic investment remain within the nation a lot longer than foreign investment. An important feature of some of the Asian Tigers growth (S. Korea and China) is that they had capital controls. The industrialization of Apartheid South Africa and Rhodesia was ably supported by finance capital remaining in the borders of their nations. Capital control policies have been complicated by increased neo-liberalism and globalization, but domestic investment doesn’t mean you cannot have FDI, it empowers you to choose the best type of investment for your nation.

Balance of payments

The most convincing argument for VFX is that its establishment can certainly help Zimbabwe deal with its perennial balance of payments problem. International financing targeted at export industries of mining will add to the foreign currency reserves of the nation. Strategic beneficiation of those minerals will also support downstream employment and infrastructure development. The balance of payments will however be limited by the tax haven status of VFX and Victoria Falls. We then shouldn’t hold onto this benefit with too much rigour.

Why a Wolf?

I defined the VFX as a wolf in wolf’s clothing because unlike a wolf in sheep’s clothing, Ncube’s intention are as clear as the daylight. Ncube with the full support of ED Mnagagwa’s government have prioritised private accumulation by use and abuse of state structures, and VFX will be another site of that accumulation. It is structured in a way that will lead to building a financial elite, increasing inequality, and developing an economy based on jobless growth. The power of finance in this century is unrivalled, that is why great care should be taken to ensure that finance is supporting the development of the productive, job intensive sectors of the economy, while keeping the finance in the country. Without that, Zimbabwe and its people will be a glorified slaves to the international economy, bled out by the wolf that is 21st century speculative finance.