The Zimbabwe dollar this week weakened against the United States as authorities struggle to defend the value of the domestic currency. The local currency, which was trading at ZW$11.11: US$1 lost 30 percent of its value.
With gold deliveries declining due to side-marketing triggered by unfavourable prices, the depreciation of the domestic currency is seen continuing in the short to medium term. Gold is the single largest foreign currency earner after overtaking tobacco last year. As the tobacco marketing season ends and mop up sales are completed, Zimbabwe will transit to a cyclical period of low foreign currency reserves, weakening domestic currency and rising inflation.
After announcing that the price of fuel will be FOB costs and foreign exchange movements, the price of fuel marginally declined and pushed demand. Resultantly long queues which had almost disappeared last week have re-emerged. This is expected to continue in the coming weeks as schools re-open. With increased demand for fuel, demand for foreign currency is also expected to surge. The growing number of bureau de changes in Zimbabwe also speaks on how government wants to widen avenues for buying foreign currency on the market. Mobile phone companies like Econet and NetOne have also joined the fray.
In our view, as Zimbabwe enters a lean period of foreign currency scarcity, government should avoid the temptations of announcing any policy measure that will prejudice foreign currency earners. Going forward, remittances from Zimbabweans living in the diaspora will be a vital source of foreign currency. Ongoing xenophobic attacks in South Africa will however affect these remittances as many locals living in South Africa are on the knife edge. We don’t anticipate any financial package for Zimbabwe during the last quarter of the year.
Apart from fuel, treasury will seek more foreign currency to settle arrears owed to regional power utilities such as Eskom of South Africa. Eskom has given Zimbabwe strict conditions for power imports to ensure that she doesn’t default. Should negotiations with HCB of Mozambique succeed, Zimbabwe will need more foreign currency for new imports. With nearly a third of the population in need of food assistance, grain imports will compete with other critical requirements for the scarce foreign currency reserves.
In this all, one can argue that Zimbabwe’s concentration of exports exposes the economy to both domestic and exogenous factors. Diversification of exports, value addition is what government should be seriously working on to ensure that the economy manoeuvres turbulent cycles. These cycles are inflationary and may cause civil unrest as the cost of living soars.
Latest statistics from the country’s statistical agency indicate that Zimbabwe recorded a trade deficit of $605 million between February and July this year, down 62 percent compared to the same period last year.
According to the Zimbabwe Statistics Agency (ZimStat) between February and July, the country exported goods and services worth $2.4 billion against imports of $1.8 billion. During the same period last year, imports stood at $3.54 billion and exports at $1.58 billion.
What is worrisome though is that exports were down 8 percent during the period under review, a situation that has a huge impact on the country’s balance of payment. Growing exports and boosting domestic output is one of the cocktail of measures that spur growth of the domestic economy which is currently facing serious headwinds.
Attracting foreign direct investments should be another key priority. FDI follows improvements in the ease of doing business in the economy. It has been observed that Zimbabwe’s investment attractiveness has somewhat declined over the year, largely due to monetary instability.
On the part of government, this is sweet news given that this development indirectly favours demand for local products which do not require foreign currency. We have consistently said stimulating domestic production is one of the key pillars of stimulating economic growth but this is only sustainable in an environment where policy is consistent and fresh capital is attracted.
We also contend that the drop in imports is attributable to various factors which include foreign currency shortages, smuggling and the new currency framework. In February, the Reserve Bank of Zimbabwe effectively introduced the local currency when it announced it had scrapped the parity policy of the domestic currency with the United States dollar.
The floating of the local currency was driven by movements on the parallel market as well as foreign exchange shortages in the informal sector. The central bank, by floating the Zimbabwe dollar, admitted that it had failed to meet the demands of a priority list of importers. If anything, the list kept on growing since Zimbabwe is a net importer.
Rising inflation since the start of the year also resulted in many Zimbabweans travelling to neighbouring countries like South Africa, Botswana, Zambia and Mozambique to buy basic commodities. Goods worth millions of dollars could have been smuggled into the country due to the porous state of our ports of entry and corruption. Resultantly, import figures released by ZimStat may not be accurate.
The introduction of the mono-currency system in June also had an impact on the country’s import bill. This major policy shift has resulted in the scarcity of foreign currency as seen by fuel shortages and difficulties in paying arrears owed to regional power utilities.