Zim’s US$2billion capital flight migraine
AT a time when Zimbabwe is desperately in need of a huge cash injection to escape current illiquid conditions, authorities have been left dumbfounded by the scale of illicit financial flows (IFFs).
Recently, the Reserve Bank of Zimbabwe (RBZ) revealed that the country is losing US$2 billion through IFFs annually.
To understand the gravity of this, a few statistics will help.
Zimbabwe has a small economy, whose Gross Domestic Product (GDP) is under US$10 billion.
Its 2016 National Budget is under US$5 billion, a figure that pales into insignificance when compared to that of South Africa.
Annually, the country has been realising foreign direct investment (FDI) at the scale of about US$400 million.
Now if US$2 billion is lost annually, it means money is flying out of the country faster than it’s coming in.
This, in itself, helps explain the liquidity crisis confronting the country’s economy.
Even though Zimbabweans based outside the country are sending US$1 billion back home in Diaspora remittances annually, their efforts fall far short of what is required to close the gap.
And by the way, there are over three million Zimbabweans in the Diaspora; the bulk of them in South Africa, the United Kingdom and the United States.
What is making the country’s situation tricky is that a huge portion of liquidity circulating locally is doing so outside the formal channels.
The now dominant informal sector is said to be holding onto an unverified US$7 billion.
Not helping the situation is the fact that the country’s productive capacity has given in to economic pressures.
In other words, the country is now a net importer. Even small things like hairpins and shoelaces are being imported, worsening the hard currency outflows.
For the authorities, it is a double headache.
Theirs is to find a solution that can plug IFFs as well as encourage the formalisation of the informal sector.
That the amount of money leaving Zimbabwe is half the country’s 2016 National Budget probably jolted the RBZ into setting off the alarm bells.
The central bank has concluded that the situation now required “national collective responsibility to transform from within in order to stimulate the economy through plugging gaps and loopholes” such as the illicit money outflows.
“Illicit financial flows are our major leaks. The issue is not necessarily that too little money flows into Zimbabwe. Rather it is what consumers and businesses do with that money. Too often it is spent on unproductive uses, IFFs (trade mispricing, externalising of export sales proceeds and remittance of unproductive and unsanctioned investments), etc. Such funds leave Zimbabwe without circulating in the economy. We are exporting liquidity. We therefore need a national “plugging the leakages approach” to transform the economy,” said John Mangudya, the RBZ governor in his monetary policy statement, presented early this month.
Economist John Robertson said not only is Zimbabwe losing capital, but it is also losing its manpower.
“We have to get good at producing the goods and services that are contributing to the capital flight. The failure in the production of those goods and services is where the problem is and that is where the government should be focusing on, instead of focusing on things that are totally irrelevant to the economy,” said Robertson.
Robertson argues that the lack of confidence in the country’s basic services such as health and education, which has seen its nationals either seeking medical care beyond the country’s borders or enrolling their children in overseas institutions, is a telling pointer to an economy that has slid deep into the doldrums.
“People, including the ministers themselves, are no longer satisfied with our services and goods, which is why they go outside for treatment as well as send their children outside the country for education; yet people used to send their children to Zimbabwe,” observed Robertson.
“In his monetary policy, the RBZ governor does not focus on seriously building the productive sector, which is a major weakness of his policy. We are now importing grain, which we never used to, and these are the things that are contributing to capital flight,” he added.
Skepticism over government and the RBZ’s efforts in decisively dealing with the situation abounds with some describing whatever the country is trying to do as largely cosmetic given the global nature of the problem of IFFs.
Kipson Gundani, chief economist at Buy Zimbabwe Trust, said the country is in the throes of a very complex problem that requires to be tackled at the global level.
“Us, as the developing countries, have also not created a conducive environment that enables us to make money to the point of wanting to stay…it’s all to do with our policies. We have, for instance not built confidence in our banking system,” Gundani observed.
As IFFs issue become critical to Zimbabwe’s economic survival, it is increasingly becoming evident that the complexities around it would take more than just the RBZ’s alarm bells to resolve.
If, according to the United Nations Economic Commission for Africa (UNECA), Africa is losing some US$50 billion every year to illicit money flows, it means Zimbabwe’s contribution to that amount is five percent, making the southern African nation’s financial hemorrhaging a major disaster.
Between 1980 and 2008, the continent lost US$1 trillion through IFFs, according to the African Union/Economic Commission for Africa High Level Panel on Illicit Financial Flows.
“Illicit financial flows out of Africa have become a matter of major concern because of the scale and negative impact of such flows on Africa’s development and governance agenda,” UNECA has noted. Although accurate data is non-existent, the estimated amounts Africa is losing are more than double the official development assistance the continent is receiving.
“Preliminary evidence shows that taking prompt action to curtail illicit financial outflows from Africa will provide a major source of funds for development programmes in the continent in the near future. One of the keys to achieving success is the adoption of laws, regulations and policies that encourage transparent financial transactions,” says UNECA.
The UN body further contends that money laundering is draining African countries’ foreign exchange reserves, reducing tax collections, cancelling out investment inflows, worsening poverty, undermining the rule of law, stifling trade and worsening macroeconomic conditions.
These money outflows are being “facilitated by some 60 international tax havens and secrecy jurisdictions that enable the creating and operating of millions of disguised corporations, shell companies, anonymous trust accounts, and fake charitable foundations”, according to UNECA.
While Zimbabwe has awoken to the dangers of IFFs, the issue has for long been on the radar of other African countries such as South Africa where the phenomenon has been tracked since 1980, which happens to be the period that Zimbabwe got its independence.
In a research paper co-authored by Seeraj Mohamed and Kade Finnoff, it is noted that “capital flight is a serious problem for South Africa, which, if not addressed, will continue to impede its ability to deal with structural issues such as high unemployment and concentration of wealth”.
The paper asserts that from between 1980 to 2000 average capital flight from South Africa, as a percentage of GDP, was 6,6 percent per year. Capital flight, however, peaked to 20 percent by 2007.
“A common explanation for capital flight from developing countries is that wealth holders move their wealth out of a country because of political and economic uncertainty. However, in South Africa it seems that wealthy people moved more money out of the country during the relatively more stable post-apartheid period than during the turbulent 1980s when the struggle against apartheid, international pressure and economic sanctions intensified…The wealthy seem to maintain a distrust of the South African government despite the government’s efforts to create a business friendly environment and their conservative approach to fiscal policy and monetary policy. This distrust will probably persist as long as the extremely high levels of inequality, unemployment and poverty continue in South Africa… Political and economic uncertainties are part of the story but not adequate explanations for capital flight from South Africa,” reads part of the paper.
Charles Goredema, a researcher at the Anti-Corruption Resource Centre, identifies corruption as a major driver of illicit money outflows.
In a paper titled: Combating illicit financial flows and related corruption in Africa Goredema concluded: “The relationship between anti-money laundering and anti-corruption strategies is a key issue for developing countries. Corruption and money laundering cannot be effectively addressed solely by the specialised agencies mandated to deal with them…Governments and donors in developing countries should work to build the capacity of the financial intelligence units and strengthen their collaboration with anti-corruption agencies and with complementary institutions and partners at home and abroad.”
For Zimbabwe and the rest of the world’s developing countries, IFFs are fast increasing the gap between the rich and poor.
“It is also clear that this trend is not just a result of the rich getting richer. There is clear evidence that this is at the expense of the poor who are also getting poorer, and are therefore actively impoverished in this process. To make matters worse, we know that we are vastly underestimating the problem,” Christian Aid, a United Kingdom-based organisation fighting against the scourge of poverty, has concluded.
Follow us on Twitter on @FingazLive and on Facebook – The Financial Gazette