VZCZCXYZ0009
PP RUEHWEB

DE RUEHSB #0279/01 0661418
ZNR UUUUU ZZH
P 071418Z MAR 06
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 9698
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS HARARE 000279 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR D/BRESNICK, USDOC FOR ITA/SMATHEWS 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV
SUBJECT: ZIMBABWE 2006 INVESTMENT CLIMATE STATEMENT 
 
REF: STATE 20194 
 
¶1. (U)  The Government of Zimbabwe,s misgovernance has 
severely crippled the local economy, making it unlikely to 
attract or absorb significant foreign direct investment in 
¶2006.  Investment prospects in Zimbabwe are bound to remain 
dismal due to the country,s unstable economic and political 
environment.  Government policies and recent constitutional 
amendments have eroded rule-of-law and put private property 
rights at grave risk. 
 
¶2. (U)  Foreign investors will find few if any sectors 
appealing at this time.  The government,s Export Processing 
Zones Authority reported that within a six month period in 
2005 33 agro-based companies ) once the economy,s backbone 
) closed down.  The World Bank/International Finance 
Corporation,s &Doing Business in 20068 survey ranked 
Zimbabwe 126 out of 155 countries considered and one of the 
worst in southern Africa.  Further illustrative of the 
deteriorating investment climate, Zimbabwe fell to last place 
out of 64 regions and countries surveyed in the 
Vancouver-based Fraser Institutes, 2004-2005 report on 
mineral policy investor friendliness. 
 
------------------------------ 
Openness to Foreign Investment 
------------------------------ 
 
¶3. (U)  The government,s intervention in many sectors makes 
Zimbabwe 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 a decade ago.  Many 
others sell their products through certified dealers. 
 
¶4. (U)  The government,s priority sectors for foreign 
investment are manufacturing, mining and infrastructure 
development for tourism.  In these sectors foreign investors 
are free to take up 100 percent ownership.  New draft mining 
legislation, however, now under consideration, would require 
foreign investors to cede a 51 percent share in foreign-owned 
mines to the government, 25 percent of which would be 
non-contributory.  In the services sector foreign investors 
are allowed to take a maximum 70 percent share holding. 
 
¶5. (U)  The government reserves several sectors for local 
investors.  Foreign investors wishing to participate in these 
sectors may only do so by entering into joint venture 
arrangements with local partners.  The foreign partners may 
take a maximum 35 percent shareholding.  The following 
industries are reserved for Zimbabwean citizens: 
 
Agriculture/Forestry 
     a) Primary production of food and cash crops 
     b) Primary horticulture 
     c) Game, wildlife ranching and livestock 
     d) Forestry 
     e) Fishing and fish farming 
     f) Poultry farming 
Transportation 
     a) Road haulage 
     b) Passenger bus, taxis and car hire services of any kind 
     c) Tourist Transportation 
-- Retail/wholesale trade, including distribution 
-- Barber shops, hairdressing and beauty salons 
-- Commercial photography 
-- Employment agencies 
-- Estate agencies 
-- Valet services 
-- Manufacturing, marketing and distribution of armaments 
-- Water provision for domestic and industrial purposes 
-- Rail operations 
-- Grain milling 
-- Bakery and confectionary 
-- Sugar refining 
-- Tobacco packaging and grading post auction 
-- Cigarette manufacturing 
 
¶6. (U)  Foreign investors wishing to start a new project in 
Zimbabwe must first register with and be approved by the 
Zimbabwe Investment Centre (ZIC), which then issues 
Investment Certificates.  The Export Processing Zones 
Authority (EPZA) is the first port of call for any investor 
wishing to invest in Export Processing Zones. 
 
¶7. (U)  All private firms are required to incorporate and 
register with the Registrar of Companies within the framework 
of their investment certificate or exchange control approval. 
 Foreign investment in existing companies requires Reserve 
Bank approval.  Applications are submitted to the Bank,s 
Exchange Control Department through the investor,s 
commercial bank or merchant bank or other authorized dealer. 
Foreign investors with valid investment certificates may 
acquire real estate. 
 
¶8. (U)  In the mid-1990s, the government identified 
privatization of Zimbabwe,s parastatal companies as a 
priority, but only two state-owned enterprises have been 
successfully privatized since then.  The parastatals, 
operational inefficiencies, weak balance sheet positions and 
their huge debt overhang make it unlikely that privatization 
will go forward in 2006. 
 
¶9. (U)  Commensurate with its anti-West stance in recent 
years, the government has begun to encourage economic ties 
with Asian countries, particularly China, as a means of 
arresting further economic decline and combating what it 
casts as neo-colonialism.  Under this &Look East8 policy, 
selected Asian investors have been offered access to reserved 
sectors, sometimes at the expense of local or established 
foreign investors.  Despite the official emphasis placed on 
these ties and a few high profile announced projects, Asian 
investment overall remains limited, especially compared to 
the presence of remaining investors from South Africa, the 
U.K, and U.S. 
 
-------------------------------- 
Conversion and Transfer Policies 
-------------------------------- 
 
¶10. (U)  For the past several years, Zimbabwe has experienced 
an acute foreign currency shortage that, among other things, 
has caused crippling shortages of fuel and other imported 
goods and components, defaults on public and private sector 
debt service payments, and a sharp decline in industrial, 
agricultural and mining operations.  Foreign currency is 
difficult to obtain due to the Reserve Bank of Zimbabwe,s 
restrictive exchange controls, the country,s declining 
ability to generate exports, and the lack of balance of 
payments support.  The Foreign Exchange Control Act regulates 
currency conversions and transfers.  It does not prohibit 
foreign investors from moving assets between Zimbabwean and 
foreign accounts, but foreign exchange shortages and 
constraints of the foreign exchange regime impede the 
remittance of investment returns.  Some local businesses have 
credibly charged that the government has raided their foreign 
currency accounts to repay past-due IMF debts. 
 
¶11. (U)  As of January 2006, exporters may retain 70 percent 
of their foreign currency account balance for their own use 
and liquidation on the interbank market within a 30-day 
retention period.  Of the remaining 30 percent, 12.5 percent 
of export proceeds must be liquidated to the Reserve Bank at 
the interbank exchange rate (effectively fixed at 
Z$99,200:US$ as of January 24, 2006), and 17.5 percent must 
be sold to the Reserve Bank at the official auction rate, 
fixed in January 2006 at Z$30,000:US$.  However, 
uncertainties associated with retention requirements and 
retention periods, which have been adjusted frequently 
without notice, constrain business planning and operations. 
 
¶12. (U)  The Foreign Exchange Control Act extends to 
prospective outward investment as well as dividend 
remittances.  Traditionally, the government has discouraged 
investment by Zimbabweans outside their country, and 
relatively few Zimbabwean firms have made such investments. 
 
------------------------------ 
Expropriation and Compensation 
------------------------------ 
 
¶13. (U)  Despite provisions in Zimbabwe's constitution that 
prohibit the acquisition of private property without 
compensation, the government has sanctioned seizures of 
privately owned agricultural land without compensation since 
¶2001.  The government in April 2000 amended the constitution 
to authorize the compulsory acquisition of privately owned 
commercial farms with compensation limited to the 
improvements made on the land.  More recently, the government 
changed the constitution again in September 2005 to transfer 
ownership of all expropriated land to the government with no 
recourse to local courts for all those who lost their farms 
since the land invasions began.  Since the passage of this 
recent amendment, top government officials, ruling party 
supporters, and members of the security forces have continued 
to disrupt production on commercial farms, including those 
owned by foreign investors. 
 
¶14. (U)  The President and other politicians have in the past 
threatened to target the mining and manufacturing sectors for 
similarly forced indigenization.  The government's program to 
seize commercial farms without either the intention or the 
funds to compensate the titleholders, and without recourse to 
the courts, has raised serious questions about respect for 
property rights and the rule of law in Zimbabwe.  Any 
potential foreign investors should take into account the risk 
of uncompensated expropriation. 
 
------------------ 
Dispute Settlement 
------------------ 
 
¶15. (U)  In the event of an investment dispute (excepting the 
current 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.  This 
option so far appears to be untested by investors. 
 
¶16. (U)  The government has 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. 
 
¶17. (U)  Government efforts to influence and intimidate the 
judiciary since the late 1990s have raised serious concerns 
in this area.  The government and ruling elite have ignored 
numerous adverse judgments, and senior officials have 
reiterated publicly that court orders that are not 
politically acceptable to the ruling party will not be 
honored.  Administration of justice in commercial cases that 
lack political overtones are generally impartial.  As the 
government,s budget constraints deepen, however, court 
resources have dwindled and dockets have become backlogged. 
A less costly dispute settlement route, which can be 
incorporated in contracts between companies, is alternative 
dispute resolution.  Companies have the option of seeking 
alternative dispute resolution in which an independent 
arbitration board resolves disputes. 
 
--------------------------------------- 
Performance Requirements and Incentives 
--------------------------------------- 
 
¶18. (U)  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; 
-- 25 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. 
 
¶19. (U)  There are no general performance requirements 
outside of Export Processing Zones.  Government policy, 
however, encourages investment in enterprises that contribute 
to rural development, job creation, exports, use of local 
materials, and transfer of appropriate technologies. 
 
¶20. (U)  There are no discriminatory import or export 
policies affecting foreign firms, although the government's 
approval criteria are heavily weighted toward export-oriented 
projects.  Import duties and related taxes range as high as 
110 percent.  Export Processing Zone designated companies 
must export at least 80 percent of output. 
 
¶21. (U)  While official policy supports "the maximum 
Zimbabwean participation" in any new investment project, no 
specific requirements for local participation have been 
defined outside the 35 percent foreign share cap in sectors 
reserved for local investment.  Nevertheless, experience has 
shown that 30 percent local participation is a widely 
accepted benchmark minimum. 
¶22. (U)  Government participation is required in new 
investments in strategic industries, such as energy and 
mining, public water provision, railways, and armaments.  The 
terms of government participation are determined on a 
case-by-case basis during license approval.  The few foreign 
investors (for example from China and Iran) in reserved 
strategic industries have either purchased existing companies 
or have supplied equipment and spares on credit. 
 
¶23. (U)  Foreign investors are expected to make maximum use 
of Zimbabwean management and technical personnel, and 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 are 
permitted to remit one-third of their salaries. 
 
-------------------------------------------- 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
¶24. (U)  Although Zimbabwean law guarantees the right to 
private ownership, this right is  increasingly not respected 
in practice.  The government, as noted above, has seized a 
number of farms and conservancies belonging to Americans and 
other foreign investors in recent years without due process 
or compensation.  Most of these property owners held Zimbabwe 
Investment Center approval certificates and purchased their 
land after independence in 1980.  Despite repeated U.S. 
protests, the government has not addressed these 
extra-judicial expropriations. 
 
¶25. (U)  In each of the last two years, President Mugabe has 
reiterated the government,s intention to enact a broad 
indigenization law, and there remains a lingering threat that 
the government could expropriate non-agricultural property 
belonging to foreign firms for the purpose of transferring 
ownership to black Zimbabweans. 
 
----------------------------- 
Protection of Property Rights 
----------------------------- 
 
¶26. (U)  The government's demonstrated desire to expand its 
control of the economy puts many investments, particularly in 
real property, at risk.  The government's 2005 Operation 
Restore Order resulted in the destruction of many licensed 
commercial and residential structures.  In addition to the 
thousands of agricultural properties seized under land reform 
during the past six years, in late 2005, the government for 
the first time authorized the seizure of non-agricultural 
land for the purpose of constructing residential stands in a 
Harare suburb.  At about the same time, the government served 
eviction notices to neighbors of President Mugabe,s suburban 
mansion ostensibly on national security grounds.  The 
eviction process, which is supposed to include compensation 
for dispossessed property owners, is ongoing. 
 
¶27. (U)  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 due to 
a lack of expertise and manpower.  We are not aware of any 
grievances over such issues, but pirating of videos and 
computer software is common.  Most videos and computer 
software sold on the local market, for example, are pirated 
goods. 
 
¶28. (U)  The judiciary generally upholds the sanctity of 
contracts between private companies.  However, in the case of 
contracts involving the government or politically influential 
individuals, judgments sometimes appear biased in favor of 
the latter. 
 
------------------------------------- 
Transparency of the Regulatory System 
------------------------------------- 
 
¶29. (U)  The government,s officially stated policy is to 
encourage competition within the private sector.  That said, 
bureaucratic functions in this increasingly controlled 
economy lack transparency and corruption within the 
regulatory system is increasingly worrisome. 
 
--------------------------------------------- ----- 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----- 
 
¶30. (U)  New portfolio investment in Zimbabwe has been very 
limited in recent years.  According to the IMF, net portfolio 
inflows reached US$2 million in 2004 after a massive outflow 
of US$68 million in 2001 in response to the start of the land 
invasions.  Zimbabwe's stock market has 80 listed companies. 
Overall, trading is thin and volatile.  The public stock of 
many 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.  In 2005, the government introduced a 5 
percent withholding tax on the sale of marketable securities. 
 It also upped the prescribed asset ratio of the National 
Social Security Authority,s investment to 35 percent at 
market value, and the prescribed asset ratio of private 
pension funds to 40 percent.  Foreign participation in the 
bond market is restricted to the primary market and only 35 
percent of invested capital may be placed in bonds. 
 
¶31. (U)  Zimbabwe's financial sector is quite large and well 
developed by Sub-Saharan African standards.  An impressive 
variety of financial instruments is traded, though thinly, 
including debentures, private sector bonds, bankers 
acceptances, treasury bills, and 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 led to the closure of a number of local banks 
and a number of top executives have been prosecuted or have 
fled the country to avoid prosecution.  These failures have 
also raised concerns about the oversight capability of the 
Reserve Bank. 
 
------------------ 
Political Violence 
------------------ 
 
¶32. (U)  The opposition and civil society operate in an 
environment of intimidation and repression.  Individuals and 
companies out of favor with the government or regarded by the 
government as aligned with the opposition, suffer harassment 
and bureaucratic obstacles in their business dealings.  The 
government has closed three independent newspapers, for 
example, and has denied numerous telecommunications licenses 
for apparently political reasons.  Domestic businesspeople 
out of favor with the government have been incarcerated for 
lengthy periods under trying conditions, including alleged 
torture, for engaging in illegal business practices such as 
externalization of currency. 
 
¶33. (U)  In April 2005, with no notice and in the middle of 
the country,s winter, the GOZ embarked upon Operation 
Restore Order, destroying the purportedly unpermitted homes, 
businesses, or both, of over 700,000 people.  Police 
demolished or forced victims to destroy their own homes and 
businesses, many of which did appear to have all relevant 
permits, without providing alternative accommodation or means 
of reestablishing their livelihoods.  The government then 
blocked the efforts of NGOs and international organizations 
to provide emergency relief. 
 
---------- 
Corruption 
---------- 
 
¶34. (U)  There is widespread corruption in government. 
Implementation of the government,s ongoing redistribution of 
expropriated commercial farms has substantially favored the 
ruling party elite and continues to lack transparency.  Top 
ruling party officials and business people supporting the 
ruling party have received priority in distribution of the 
country,s resources, including priority access to limited 
foreign exchange and fuel.  The government,s campaign to 
provide housing plots and vending sites for victims of 
Operation Restore Order appears to be benefiting mostly civil 
servants, security forces, and ruling party supporters. 
 
¶35. (U)  In January 2005 the government enacted an 
Anti-Corruption Act, which established a government-appointed 
Anti-Corruption Commission; however, it includes no members 
from civil society or the private sector.  In the same month, 
the government established the Ministry of State Enterprises, 
Anti-Monopolies, and Anti-Corruption to investigate and raise 
awareness about corruption; however, government officials and 
police lack sufficient political backing by senior levels of 
the government to effectively investigate the corruption. 
The government prosecutes individuals selectively, focusing 
on those who have fallen out of favor with the ruling party 
and ignoring transgressions by favored elite. 
 
------------------------------- 
Bilateral Investment Agreements 
------------------------------- 
 
¶36. (U)  The U.S. has no bilateral investment or trade treaty 
with Zimbabwe.  Zimbabwe currently has bilateral investment 
agreements with Germany, the United Kingdom, Netherlands, 
Belgium, Portugal, Switzerland, Sweden, Malaysia, Mozambique 
and China.  It is negotiating bilateral investment treaties 
with Italy and South Africa.  However, as noted above, 
commercial farms covered by some of the treaties have been 
seized or listed for acquisition, thereby denying the owner 
benefits under these treaties. 
 
-------------------------------------------- 
OPIC and Other Investment Insurance Programs 
-------------------------------------------- 
 
¶37. (U)  The U.S. Government and Zimbabwe concluded an OPIC 
agreement in April 1999. Zimbabwe acceded to the World Bank's 
multilateral investment guarantee agency (MIGA) in September 
¶1989.  Support by the Export-Import Bank of the U.S. is not 
available to Zimbabwe.  Many other major donor countries have 
also suspended their trade finance and export promotion 
programs, as well as investment insurance, due largely to 
Zimbabwe,s mounting bilateral arrears and deteriorating 
investment climate. 
 
----- 
Labor 
----- 
 
¶38. (U)  Zimbabwe,s interconnected economic and political 
crises have prompted many of the country,s most skilled and 
well educated to emigrate, leading to widespread labor 
shortages for managerial and technical jobs.  At the same 
time, the severe contraction of the economy in recent years 
has caused formal sector employment to drop significantly. 
The best available surveys place formal sector unemployment 
as high as 80 percent.  As noted above, foreign investors are 
encouraged to hire local nationals. 
 
¶39. (U)  The country's HIV/AIDS epidemic is also taking a 
heavy toll on the workforce.  However, with substantial 
support from the U.S. Government and other donors, Zimbabwe 
has instituted policies that have contributed to reducing the 
adult infection rate from 24.6 percent in 2003 to 20.1 
percent in 2005, making Zimbabwe only the second country in 
Sub-Saharan Africa to stem the disease,s tide. 
 
¶40. (U)  The government is a signatory to International Labor 
Organization (ILO) conventions protecting worker rights, 
although the world body recently designated Zimbabwe as a 
"notorious country" for its continued attempts to limit 
workers' right to organize and hold labor union meetings. 
The 1985 Labor Relations Act set strict standards for 
occupational health and safety, but enforcement is fairly lax 
and inconsistent across the industrial sectors. 
 
¶41. (U)  In light of the hyperinflationary environment (the 
inflation rate is widely accepted to have reached quadruple 
digits as of March 2006, although the government maintains it 
is in the mid-triple digits), employers and workers have 
agreed to negotiate wages and other benefits on a quarterly 
rather than annual basis.  Collective bargaining takes place 
through a National Employment Council (NEC) in each industry, 
comprising representatives from labor, business, and 
government.  In addition, the Zimbabwe Congress of Trade 
Unions (ZCTU), the country's umbrella labor organization and 
traditional advocate for workers to both business and 
government.  In addition, a Tripartite Negotiating Forum 
(TNF) was established in 2001 for labor, business, and 
government to tackle macro-social issues.  However, these 
talks have been fitful and unproductive since their 
inception. 
 
¶42. (U)  Beginning in January 2005, the government stepped-up 
harassment of the ZCTU and its leadership, and has launched 
investigations into alleged financial improprieties at ZCTU. 
Under Zimbabwe labor law, the government can intervene in 
ZCTU,s internal affairs if it determines that the leadership 
is not acting in the workers, interest.  The government has 
threatened to eliminate the ZCTU, and has taken steps to 
marginalize the traditional unions and the formal labor 
dispute resolution mechanism.  To undercut the strength of 
ZCTU, the government has created an alternative umbrella 
organization, the Zimbabwe Federation of Trade Unions (ZFTU). 
 However, outside of government or the state-controlled 
media, the ZFTU is not regarded as a legitimate labor 
organization.  The ZCTU remains the voice of labor in 
Zimbabwe and the country,s official and internationally 
recognized labor organization. 
 
------------------------------ 
Foreign-Trade Zones/Free Ports 
------------------------------ 
 
¶43. (U)  The government promulgated legislation creating 
Export Processing Zones (EPZs) in 1996.  Zimbabwe now has 183 
Export Processing Zone designated companies.  Benefits 
include a five-year tax holiday, duty-free importation of raw 
materials and capital equipment for use in the EPZ, and no 
tax liability from capital gains arising from the sale of 
property forming part of the investment in EPZs.  Since 
January 2004 the government has generally required that 
foreign capital comprise a majority of the investment.  The 
requirement on EPZ designated companies to export at least 80 
percent of output has constrained foreign investment in the 
zones.  The government has recently drafted legislation, 
which, if approved, would dissolve the Zimbabwe Investment 
Centre and the related Export Processing Zones Authority and 
replace them with a new National Investment Authority. 
 
------------------------------------ 
Foreign Direct Investment Statistics 
------------------------------------ 
 
¶44. (U) Zimbabwe Net Investment Flows 1998-2004 in Million 
US$ 
 
1998  1999  2000  2001  2002  2003  2004 est, 
Direct Investment 
436    50    16    0      23    4     9 
 
Portfolio Investment 
11     21    -1    -68    -2    4     2 
 
Source: IMF 
 
--------- 
Resources 
--------- 
 
¶45. (U) 
Zimbabwe Investment Centre 
Investment House 
109 Rotten Row 
P.O. Box 5950 
Harare 
Telephone: (263) (4) 757931/4 
Fax: (263) (4) 759 917 
www.zic.co.zw 
 
Zimbabawe Tourism Authority: 
www.tourismzimbabwe.co.zw 
Export Processing Zones Authority: 
www.epz.co.zw 
Privatization agency of Zimbabwe: 
www.paz.co.zw 
Zimtrade: 
www.zimtrade.co.zw 
Zimbabwe International Trade Fair: 
www.ztf.mweb.co.zw 
 
DELL