Diamonds are Zanu-PF's best friend

24 April 2014

Revenues from the rough - and conflict-tainted - alluvial diamonds of Zimbabwe's Marange fields kept Zanu-PF going during the years of the coalition government with the two Movement for Democratic Change (MDC) parties.

Whether, or to what extent, these monies bypassed the national treasury to fund Zanu-PF's election campaign last year, among other things, is a moot point. MDC Secretary-General and Zimbabwe's former finance minister, Tendai Biti always complained that he saw little, if any, of the money - though independent investigators from the European diamond industry said otherwise in a report that has been given very little public attention.

But since Zanu-PF took sole charge of the government in the elections of last July, the point has become rather academic - because we will probably never know the truth anyway.

What is clear, though, is that Biti's successor at the treasury, Patrick Chinamasa, is struggling even harder to raise income because of the even greater loss of confidence in a solely Zanu-PF government. That has prompted people to withdraw money - let alone invest any new money into the country. Not the least of their misgivings is the government's threat to indigenise 51% of their investments.

As a result, the economy as a whole seems to have moved onto a steady downward trajectory, with revenue collection dropping 10% in February, for example.

The Marange diamonds are still pulling in tax, but it is not enough to cover costs - particularly civil service wages, which account for nearly 60% of government expenditure. That will increase if a promised pay rise goes through.

Since the elections, Chinamasa has been scouring both the West and the East for money - yet in vain. Last year the International Monetary Fund (IMF) and the World Bank both turned him down, telling him that until he cleared Zimbabwe's arrears, they could not give him new money.

Short of an IMF agreement, other creditors won't reschedule repayment of their debts.

Ever since he fell out with the West over a decade ago, President Robert Mugabe has been fond of saying he doesn't need it anyway and would look East for help. But Chinamasa has reportedly also failed to persuade the savvy Chinese to put more money into that risky enterprise - Zimbabwe Inc.

Presidential Affairs Minister Didymus Mutasa complained this week that ‘the Chinese have not been forthcoming. We can not look East or West. We need to look within ourselves.'

Now another rough Diamond - or should that be a smooth operator? - has come to the country and the ruling party's rescue... or so Chinamasa hopes.

The Atlas Mara fund run by Bob Diamond, former chief executive officer of Britain's Barclays Bank, announced a few weeks ago that it would buy the regional BancABC group - which operates mainly in Zimbabwe but also in neighbouring Botswana - for US$210 million. It would also inject additional capital of US$100 million into the bank, of which US$40 million would go into Zimbabwe.

Some economists say this would be the biggest infusion of capital into Zimbabwe since it abandoned its failed currency in 2008. Others point out, though, that BancABC's real focus is Botswana.

Diamond was forced to quit Barclays last year after allegations that some of his traders manipulated rates. He formed Atlas Mara with Uganda's Ashish Thakkar, billed as Africa's youngest billionaire. They reportedly raised US$325 million last year for the fund, which is intended to invest mainly in Africa.

‘Through this investment, [Atlas Mara] demonstrate[s] that Zimbabwe is a safe and attractive investment destination to the international community and capital markets,' the firm said, pledging to ease Zimbabwe's liquidity crisis and sounding sweet music to Zanu-PF's ears.

Chinamasa announced soon after that the Atlas Mara fund had promised to help the government to float a €150 million eurobond.

Africa Confidential quoted financial experts as saying that the bond would need a high premium to sell, given the political risk, in the same way that Zimbabwe has been paying premium interest rates on such loans as it has been able to raise until now, mainly from South African banks. But Zimbabwe is desperate, as Chinamasa has frankly admitted, saying in March that the country's only reserves were US$501 390 in gold coins.

According to Africa Confidential, Zimbabwe's current account deficit widened to US$3,8 billion in 2013, from US $2,4 billion in 2012. This is largely due to an increasing imports bill, which reached US$7,682 billion in 2013, and is forecast to grow to US$8,321 billion in 2014.

But if it's obvious that Zimbabwe needed the deal, what is less clear is what Diamond and Thakkar will get out of this investment. Some commentators hinted that their main reward for riding to Zimbabwe's rescue would be a waiver of their obligations under the indigenisation law to sell over half of their investment to locals. Yet Atlas Mara indicated otherwise when they announced the investment, immediately pledging to sell part of their equity to BancABC Chief Executive Officer Doug Munatsi and his local partners.

However, it seems significant that this week Chinamasa said it was nonsense that the government was demanding a controlling interest in foreign banks and would adopt a sector-by-sector approach.

So - is this a bold investment by an adventurous investor, prepared to get in on the ground floor and rise with a recovering economy? Or do we detect a whiff of crony capitalism, of Diamond and Thakkar winning special government favours in exchange for their rescue act - as a few other entrepreneurs who spring to mind have done over the years of Zanu-PF rule?

This will surely be an investment worth watching to establish that fact.

The investment does, however, pour quite a lot of cold water on the persistent rumours that Zanu-PF is about to bring back the old Zimbabwe dollar so it can print as much money as it wants to resolve its liquidity crisis.

Apart from the fact that their investment makes such a drastic manoeuvre less necessary, Diamond and Thakkar would presumably not be sinking several million US dollars into an economy where inflation is about to rocket, as it surely would and as it certainly did, before the old Zimbabwe dollar was killed in 2009 and the country moved onto the US dollar, as well as the South African Rand, Chinese yuan (renminbi), Japanese yen and Australian dollar.

But much more money will have to flow into Zimbabwe before the rumours of a return of the Zimbabwe dollar completely go away... and before one can establish if this Diamond is forever.

Peter Fabricius is Foreign Editor, Independent Newspapers, South Africa.

This article first appeared in ISS Weekly, the online newsletter of the Institute for Security Studies.

Click here to sign up to receive our free daily headline email newsletter