1. In Zambia, a lot of strange things take place and what is strange is not that strange things take place per se, but that no one raises eye brows or indeed asks any questions why such strange things happen; that is what is really strange!
2. For a long time now, whenever the government wants to point to its successes, the amount of FDI attracted to Zambia seems to be their strongest point, or so it appears. FDI or Foreign Direct Investment is by definition an investment made by a foreign individual and/or corporate entity into the Zambia. So the government normally argues that for it to attract FDI, it means that it is providing a conducive environment to make the country attractive to foreign investors. This sounds like a compelling argument until you pay much closer attention by looking at the key considerations that foreign investors would normally make before committing their money to a country and then determining the extent to which Zambia fairs in those areas vis a vis some of our neighbors.
3. These foreign investor considerations include policy consistency by government. Foreign Investors usually want certainty. They don’t want a situation where authorities shift goal posts at the wink of an eye. They don’t want a situation whereby authorities introduce SI 35 and SI 55 today and withdraw them tomorrow, or where Mineral Royalty Tax is introduced today and withdrawn tomorrow, or where an importation ban on fruits and vegetables is introduced today and withdrawn tomorrow or where the issue of work and residency permits is suspended suddenly without warning or indeed any form of policy consistency. Foreign investors normally want certainty and any changes in government policy to be introduced gradually and not “with immediate effect”, so that they can be able to plan and incorporate such changes in regulations into their business plans.
4. Foreign investors also like a destination where the cost of doing business is relatively lower. Now, when you talk about the cost of doing business, from the perspective of a foreign investor, we are not talking about the minimum wage or the fees payable for a work and residency permit, or the amount payable for a trading license, no! We are talking about the level of productivity and work ethic of our workforce, the time it takes to get a work and residency permit and the ease of the procedure to get a trading license. Those are the things that matter most to foreign investors.
5. Foreign investors also want political stability by having a stable government with a clear mandate which is likely to continue for the foreseeable future and not a government with a thin mandate of only about 15,000 votes which may possibly be replaced at the next election and all its policy positions reversed by a new government.
6. However, when l pay close attention to the flow of FDI in Zambia, l can’t help but to notice that it is very resilient to all these supposed key considerations outlined above, whereas the FDI of other economies in the region are very susceptible to all these factors listed above. One may argue that it is a good thing that we have an economy whose FDI is resilient from the normal factors which FDI is supposed to be dependent upon. However, before we can hold a celebration party, let us try to examine the possible reasons for this scenario.
7. The starting point is to look at the main driving force of FDI, which is business opportunity. In order for a country to receive an injection of FDI, there has to be business opportunities which a foreign individual and/or business entity can exploit to make a profit. So given that Zambia has an insatiable appetite for FDI, it simply means that we have unlimited business opportunities. From my observation, that is very true. Having lived in several countries in the region, l can confidently say that if there is any country in the region where it is very easy for an individual or corporate entity to make super normal profits, Zambia is that country. Again someone may argue that this is cause for celebration and we need to call for a party, but maybe not so quick.
8. Let us try to examine why there are too many business opportunities in Zambia compared to other countries in the region. The starting point is that business opportunities can only pile up the way they have in Zambia if they are not exploited. Secondly, in order to exploit a business opportunity, one needs cash or in more fancy terms, capital. Forget about the other three factors of production that are taught in elementary economics, capital can buy all of them.
9. At this point, it would be fair to conclude that the main reason we have very high FDI inflows as a country is because we have too many splendid business opportunities which allow foreign investors to make supernormal profits within a very short period, and the main reason that we have too many splendid business opportunities is because Zambians lack capital to exploit these splendid business opportunities and that only foreigners have the capacity to exploit our business opportunities while we watch in awe.
10. Before we jump to the conclusion above, let us test this hypothesis first and see if it will hold water. Let us examine the three main sources of investment capital, which is savings, capital markets and bank loans. On savings, by virtue of my job as an Auditor and having examined the personal and corporate balance sheets of thousands of our citizens and local corporate entities, l can say with reasonable certainty that more than 98% of Zambians and Zambian owned companies live on hand to mouth. Even the majority of the people you see living in big mansions, driving big cars, occupying big positions in government and the private sector live on hand to mouth, with no significant savings to their name. The consequence of this situation is that as a nation, we cannot rely on savings as a source of capital.
11. When we examine the second possible source of capital, which is the capital markets such as the Lusaka Stock Exchange (LuSE), you will realize again that our capital markets are not liquid. They are not active. This is largely attributed to two factors. Firstly because our citizens lack savings to invest on capital markets and secondly because capital markets are dominated by institutional investors who don’t take an active interest in maximizing their returns by trading their stock. They simply hold the stock and go to sleep.
12. When we examine the third main source of capital, which is bank loans, we realize that the extremely high cost of borrowing makes bank loans untenable as a source of long term investment capital. With current borrowing rates hovering around 40% per annum, plus the stringent requirements for collateral security, most Zambians can afford bank financing.
13. Having tested and proved our hypothesis, we can now safely and confidently conclude that the main reason we have very high FDI inflows as a country is because we have too many splendid business opportunities which allow foreign investors to make supernormal profits within a very short period, and the main reason that we have too many splendid business opportunities is because Zambians lack capital to exploit these splendid business opportunities and that only foreigners have the capacity to exploit our business opportunities while we watch in awe. We can further conclude that in our particular case as Zambia, FDI inflows are not a sign of a well run government that is able to attract foreign investors but rather a sign of a poorly run government that is too myopic to realize that it’s own citizens lack the capacity to participate in their own economy. That is why we are unlikely to see any individual Zambian emerge as financially successful and claim a seat among the richest people in the region. Even economically ravaged countries like Zimbabwe, Tanzania, Malawi etc., have notable successful businessmen but not Zambia. In my own assessment, l don’t think the richest Zambian is worth more than US$50 million and yet our government continually celebrates FDI inflows. Our government celebrates foreigners coming to exploit us. This is a curious case where failure is celebrated.