Vic Falls foreign exchange: A potential game Changer

The Zimbabwean government announced that it will soon launch the Victoria Falls Securities Exchange (VFEX) as part of a broader plan to turn the renowned resort town into an offshore International Finance Centre (IFC). The VFEX will be managed by the Zimbabwe Stock Exchange (ZSE) and liberalized to trade in foreign currency only. The town (home to one of the 7 natural wonders of the world) has already been accorded a Special Economic Zone (SEZ) for tourism and financial services in order to increase tourism arrivals and investment inflows into Zimbabwe. Last year the country received 2.29 million tourists, down 11% from the all-time high of 2.57 million realized in 2018. The decline was attributed to destination negative image issues and safety concerns after the country's harmonized elections.

Foreign Direct Investment (FDI) inflows and portfolio investments into Zimbabwe have been plummeting over the past 2 years. The sharp decline in FDI Inflows from US$717 million recorded in 2018 to US$259 million in 2019 highlights the country's persistent challenges to attract long term investment despite the abundance of investment opportunities in the local market.  Short term investments as represented by portfolio investments (Financial securities and equities) plunged by more than 93% to US$3.7 million in the same period, indicating a sharp deterioration in the investment climate. In the last 4 months, foreign investors bought a monthly average of just above US$1 million worth of shares on the local bourse, down from a monthly average peak of US$26 million in 2013.


Unresolved investor concerns on Zimbabwe range from failure to repatriate capital gains and dividends, inconsistent exchange rate policies, bureaucracy in government on new investments (especially in mining and agriculture), property rights abuses and flawed rule of law. Equity investors lost millions in February 2019 when the government re-introduced the Zimbabwean Dollar and converted all foreign exchange valued investments to the local currency at an exchange rate of 1 US$: 1 ZWL$. The local currency has all but lost its entire value due to runaway inflation and this has eroded value for investors. In January 2019, the market capitalization of the Zimbabwe Stock Exchange was close to US$21 billion and now it has plummeted to US$1.3 billion if open market rates are used or US$2.6 billion if the central bank fixed interbank rate is used.  

The idea of an international financial centre has worked wonders for various emerging and developed countries in the world. IFCs can be classified into domestic, global, regional and offshore financial centres. Offshore financial centres are mainly cities or countries which enact policies to attract foreign currency denominated investments, by allowing relatively free entry, flexible tax regimes and encouraging regulatory frameworks to non-resident businesses. In June 2018, the International Monetary Fund (IMF) produced a list of top 8 IFCs who are responsible for 85% of the offshore financial flows. The list includes Singapore, Mauritius, Hong Kong, Netherlands, Bermuda, The Cayman Islands, British Virgin Islands and Ireland. The key success factors of offshore financial centres include the removal of all currency and capital controls, low taxation, relaxed regulatory environment (ease of doing business) and secure investment protection (guarantees to property rights). The 2008 global financial crisis however placed a lot of criticism on offshore financial centres for aiding in tax evasion, money laundering, shadow banking, market manipulation and illicit financial flows for the wealthy or blacklisted individuals. Be that as it may, increased banking transparency and institution of common international banking standards have managed to keep offshore financial centres attractive.

The launch of an offshore financial centre in Victoria Falls will provide immense benefits to investors, the town and the country as a whole. These benefits include:

Improvement to tourism numbers


World over, offshore financial services are linked to tourism. The tourism industry provides close to US$1 billion in foreign currency to Zimbabwe every year and offers employment to about 1 million citizens directly and indirectly in the supply chain. The foreign earnings are vital for the provision of liquidity to the formal economy which is starved of foreign currency. Zimbabwe was named number 9 out of ten 10 must-see tourist destinations in the world in 2019 by National Geographic Traveler. It boasts of diverse attractions which include 5 UNESCO World Heritage sites (Victoria Falls, Great Zimbabwe Ruins, Khami Ruins, Mana Pools, and Matopos). Other attractions include Lake Kariba, the Eastern Highlands and over 26 game parks and safari areas. The establishment of a financial centre in Victoria Falls will help to market the country as a safe tourist destination and provide a ripple effect to other tourism hotspots across the country.

Value for investors

Local and foreign investors on the local securities market are yearning for a long term store of value in the financial markets. The launch of the VFEX will help in the reduction of currency risk for international businesses that operate in Zimbabwe and all pension funds that have to invest a prescribed portion of their value in foreign assets to hedge against the risk of inflation. The bourse will provide real capital for local firms and help to keep foreign assets within the country. Zimbabwe has lost billions through capital outflows by local investors who store their capital in countries such as Mauritius, Panama, Switzerland and South Africa among others due macroeconomic challenges.

Infrastructure development in Victoria Falls


The growth in tourism numbers for Victoria Falls and the subsequent flow of capital will necessitate the development of banking, insurance, telecommunications, road, transport and real estate infrastructure in the town so as to support demand for financial services. The provision of such infrastructure has ripple effects to the local economy.

Attracting Global Capital


Offshore financial centres are key in attracting trade finance, mutual funds, hedge funds, unit trusts and joint ventures from global investors and corporations because of their tax haven model. Closer home, international finance is a core part of the Mauritian economy. Mauritius's financial sector is enormous, it accounts for US$630 billion of foreign assets, some 50 times the level of the country's GDP (According to an IMF report, 2017). It contributes US$1 billion to GDP and US$180 million in tax revenues (8% of total) every year, and provides more than 4% of skilled labour. If Victoria Falls can emulate even 1% of this value in foreign assets, then it will significantly tilt the balance of capital flows to Zimbabwe's advantage in the Southern African Development Community (SADC) region.

The launch of the foreign currency indexed securities market in Victoria Falls has immense benefits for the town and the country as a whole. The initiative will undoubtedly increase tourism numbers beyond 3 million while promoting business for other hotspots that get limited coverage on the local market. International finance has transformed Mauritius into a global investment hotspot while bringing millions of tourists to the island. Unlike Zimbabwe, Mauritius and other Offshore Financial Centres are known for economic competitiveness, friendly investment climate, good governance, rule of law and a free economy. For VFEX to be a real game-changer and attract non-resident capital into Zimbabwe, the government has to provide relaxed regulations, guarantees to property rights, free repatriation of capital gains and dividends among other key success factors discussed above. It's about time Zimbabwe's economy is diversified from mining and agriculture, and be packaged for financial services.

Victor Bhoroma is a writer and freelance economic analyst. He holds an MBA from the University of Zimbabwe (UZ). For feedback, mail on vbhoroma@gmail.com or follow him on Twitter @VictorBhoroma1.

Source: Vic Falls foreign exchange: A potential game Changer (20/05/20)