By: Barnabas Thondhlana
United Kingdom-based researcher Exotix Partners, has projected Zimbabwe’s current account deficit to rise to US$2,8 billion this year, largely due to a widening trade deficit despite a comprehensive ban on imports to restrict cash outflows.
This is likely to compound the country’s credit risk, particularly at a time President Robert Mugabe’s government is trying to seek funding to settle US$1,8 billion arrears to multi-lateral lenders to open doors for balance of payment support.
The widening current account deficit, which London-based advisory, Exotix Partners, said had cumulatively reached US$20 billion last year after the country’s trading position remained in negative territory for the seventh year running since adoption of a hard currency regime in 2009, was causing a depletion of the stock of money in the economy.
The deficit narrowed only slightly to US$2,5 billion last year, from US$2,6 billion the previous year, Exotix indicated. When Zimbabwe ditched its vulnerable currency to escape relentless inflationary pressures, it lost the ability to control its monetary policy and create its own liquidity through money printing.
So, the best way to create liquidity under a hard currency environment is primarily through exports, which help create the stock of money in the economy.
But since 2009, imports have grown faster than exports, resulting in a widening trade deficit. Moreover, Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya, has indicated that more cash has been lost through “externalisation of export sales proceeds by corporates through individual accounts”.
Zimbabwe, which is in debt distress, has growing external debt arrears that have closed avenues for funding of both the national budget and infrastructure projects, badly needed to revive its faltering economy.
But Exotix warned that Zimbabwe’s current account deficit was unlikely to slow down due to an “overreliance” on the strengthening greenback. Due to the dominance of the US dollar in local trade, Zimbabwe’s products have become far less competitive in export markets. If the country had its own currency, it could devalue its unit to make exports more competitive and therefore raise more export receipts and even grow its own industries.
“The cumulative trade deficit of a dollarised Zimbabwe from 2009 to 2015 has been US$19,5 billon, which is equivalent to 1,4x the current size of the Zimbabwean economy today,” said the report.
The country’s Gross Domestic Product (GDP) is estimated at about US$14.4 billion.
“Zimbabwe has been consistently importing more merchandise than it has been exporting. The use of the United States dollar has dominated the bulk of all cash transactions. Although Zimbabwe has built a strong reliance on the US dollar, the bulk of its trade flow comes from South Africa. Seventy three percent of all Zimbabwean exports go to South Africa and 43 percent of all imports into Zimbabwe come from South Africa. The weakness of the South African rand has been particularly painful for the competitiveness of Zimbabwean exports to South Africa,” the report added.
The researchers warned that the country’s trade deficit had been amplified by over reliance on the greenback.
“To add to Zimbabwe’s over-reliance on the US dollar, its trade balance in US dollars has been consistently negative since dollarisation,” said the report, which was dispatched to clients on July 20.
International Monetary Fund (IMF) statistics indicate that last year, Zimbabwe exported US$3,6 billion worth of merchandise. It imported US$6,1 billion worth of goods, translating into a US$2,5 billion negative trade balance.
The report said remittances from Zimbabweans abroad had done little to ameliorate the situation.
“As per RBZ (Reserve Bank of Zimbabwe), remittances by Zimbabweans in the diaspora amounted to US$935 million in 2015. However, the RBZ also noted that US$684 million was externalised by individuals for various purposes that included donations, investments and account transfers.
“In addition, the RBZ noted that US$1.2 billion (or 33 percent) of total export proceeds in 2015 were externalised by firms,” it said. The data indicates that the current account deficit, which stood at about 45 percent of GDP in 2009, was at 15 percent of GDP in 2015, representing a decline.
But it is expected to rise to 20 percent of GDP this year. The bad news is that the country has been finding it difficult to attract foreign direct investment to finance the deficit due to harsh investment laws, turmoil in politics and discontentment over escalating hardships.
Exotics said during its researchers’ meetings in Harare, local bankers and economists were largely optimistic.
“We had the pleasure of going to Harare to visit Zimbabwe’s leading banks, the IMF and a leading local economist. Whilst the general mood was optimistic, as people were broadly encouraged by the efforts made by the Minister of Finance and governor of the Reserve Bank to reach out to western governments and DFIs (development finance institutions), we came away very disillusioned,” the report said.
“We were hoping to see evidence of Zimbabwe having no other option but to make an immediate and sincere policy reversal, but found a Zimbabwe with lots of options and time. This can only mean more pain for minority shareholders of equity.
“The dollarisation of Zimbabwe in April 2009 was actually not supposed to be about the sole use of the US dollar as a legal tender, but rather, about the adoption of a multi-currency regime. However, when the government made it clear that it would conduct all its transactions in US dollars, the private sector quickly followed suit.
“As a consequence of this, Zimbabwe is now priced in US dollars, but effectively funded in South African rand (its main trading partner).
This mismatch between pricing and funding has been the fundamental flaw in the dollarisation process,” added Exotix.
“Zimbabwe’s ratio of cumulative FDI since 2010 to its current forecast GDP is the lowest of its peers. Even Somalia had a higher ratio (29 percent vs 16 percent for Zimbabwe). In absolute terms, the cumulative FDI inflows into Somalia since 2010 are US$1.7 billion, only US$600 million less than Zimbabwe over the same period. This is despite the economy of Zimbabwe being more than twice the size of Somalia,” the report said.
