The crisis at hand in Zimbabwe is closely related to the developments on the external sector of the economy. At the heart of the crisis is a weakening local currency as represented by the RTGS and the Bond Note against the US dollar. Cash has broadly been scarce, more-so the hard currency which is earned through trade with other nations.
On the outset a healthy trade balance is one where the economy sells more of its produce to other nations that it buys from them a phenomena known as trade surplus or positive trade balance. The opposite, which occurs when a country consumes or demands more of imports than it exports is often undesirable as it produces a net negative trade balance.
In 2018 Zimbabwe exported goods worth $4.3 billion which compares to imports valued at $6.9 million. The net result is a net trade defict of $2.5 billion. So in essence Zimbabwe spend more on imports than it earned from exports. This outcome wat however not so unexpected as the country has incurred a deficit in all years since 2009 as shown below. This gap was however beginning to close on narrow down late into dollarization notably in 2017 before widening again in 2018 and essentially breaking a 5 year trend of deficit reduction.
Further processing of the data shows that despite a worse off trade gap, exports have been growing and in fact growing fast and at over the last 2 years, they grew by an average of 25% per annum which is commendable. In 2018 exports touched the highest level in a decade coming in at $4.4 billion up from $3.7 billion in 2017. So was this exports level not enough to cushion the economy’s forex needs and avert the present crisis. Some are of the view that Zimbabwe could thrive with exports of about $4.3 billion given the economy size. This group fails to acknowledge that the net is trade position is wide off and when compared to GDP the resultant ration is unsustainable. This ratio shows that Zimbabwe is less competitive on the export market and consequently it results in exchange rate value loss.
Another factor which makes such a exports value position not enough to stabilise the economy is because there is a growing money supply in the economy and pitted against it is a slower growing forex base, which forex is largely earned from exports. So as money supply is rising due to government need to satisfy its budgetary demands, aggregate demand in the economy grows, people demand more fuel more food more cars etc and the bulk of these products are imported. Ultimately government has to allocate the scarce forex against the higher money supply in the banking system and market rerates as shortages arises.
What Zimbabwe has witnessed over the last 24 months is a growth in imports appetite in line with demand. Companies importing raw materials also competed for forex together with fuel suppliers, oil processors, bakers etc. As the jam at the RBZ grew, a parallel market for forex emerged resulting in a plummeting of the local currencies. So exports grew but likewise imports also grew driven by a growth in money supply and the scarce forex value shot up against its growing demand, also spurred by the corresponding growth in local money supply.
In one of the premium articles I wrote in 2018 I mentioned that the Central Bank was chasing the wind and indeed that is the position today. RBZ has been pivotal in driving export activity, through facilitation of small scale miners funding and prioritisation of exporters among other measures. However in as much as the Bank did so it also was creating money through treasury bills to finance government’s expenditure beyond budget. This would naturally drive imports up, lower the value of local money in the banking system and sustain financial sector instability.
Is government on the right path?
Already government has sought to deal with the imports bill through punitive tax regimes on some imports deemed as luxury and in recent weeks it also increased the price of fuel to discourage demand. fuel is the most demanded import accounting for over 30% of the total bill. An increase in its price will likely dampen growth in imports, but the downside of inflation can be menacing. Over the last 3 months since the introduction of the 2% tax and the split in nostros, inflation has risen sharply is now at 42% up from 5% in September. After a 250% increase in the price of fuel the figure could jump to between 55% and 75% over the next 2 months a through a spiralling effect, the wave may fail to be contained although government hopes that manufacturers would fall for the rebate.
– Equity Axis News
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