HomeBusiness Digest‘Trade deficit key to easing liquidity crunch’

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Economic  recovery  in  the review period  necessitated the absorption of substantial imports in raw materials, spares and machinery to support the recapitalisation of operations and industrial activity, resulting in capacity utilisation increasing from below 30% in 2009 to 57% now.

“This notwithstanding, export performance responded modestly in the backdrop of underlying production bottlenecks. This negative development has resulted in a widening mismatch between exports and imports,” the Reserve Bank says.

It also states that despite improved export performance since 2009, the trade balance has widened significantly from US$1,599 million in 2009 to US$3,088 million in 2011.

Recent trade figures show that in 2011 motor vehicle imports gobbled a massive US$1,365 billion or 18% of total imports as compared to US$980million for machinery, US$59 million for electricity, US$1,571 billion for fuel and US$513 million spent on food imports. Chemicals and other manufactured goods accounted for US$1,013 billion and $1,110 billion, respectively.

Under the multi-currency system, the major source of liquidity is export receipts and transfers. That is where the country gets its money from. More exports mean more liquidity in the economy and if the country is importing more than it is exporting, liquidity will diminish.

Liquidity also comes from capital inflows through offshore loans, grants, foreign direct investment and transfer payments such as remittances from the dispora. Supply side constraints in the Zimbabwean economy in the aftermath of the rapid contraction of productive economic activity between 2000 and 2008 have promoted the huge appetite for imports. The period saw the absorption of inordinate amounts of imports, largely finished goods such as foodstuffs and motor vehicles which gained prominence against a backdrop of declining local agricultural productivity and industrial capacity utilisation that  dropped to as low as 15%.

Analysts have attributed the rapid informalisation of the economy to a shift from productive enterprises to trading to which most small businesses are suited owing to the small capital requirements for cross-border trading, among other barriers to entry and exit. Many people have gone into self-employment as either cross-border traders or commodity brokers, resulting in massive imports of goods for resale.

Post-dollarisation in 2009, Zimbabwe has seen a semblance of recovery in the manufacturing sector which was ruined during the economic crisis. The sector’s problem was compounded by outdated and obsolete machinery and equipment, as well as power shortages, lack of working capital and that inputs, if available, are usually costly. This has made local  products highly uncompetitive.

Analysts say sustaining the impressive economic growth rates which averaged 5,7%, 8,3% and 9,4% for 2009, 2010, and 2011,  is crucial to increasing importation of raw materials, spares, and machinery and equipment, among other things. It is against this background that the country has seen a dramatic increase  in imports over the period 2009 to 2011.

While this is happening, the immense export growth potential of the Zimbabwean economy continues to suffer from lack of ability to beneficiate primary production in agriculture and mining, forcing the country to continue exporting raw materials, with mineral exports accounting for over 40% of total exports. Deterioration in macroeconomic conditions mainly from 2000 to 2008 worsened the country’s political risk profile, while creating hostile conditions for investment.

The global financial crisis, which engulfed the world economy in 2008, as well as repercussions of the euro-zone debt crisis in 2011 and depressed international commodity prices helped decelerate potential export growth, hampering trade and growth prospects for commodity-dependent economies such as Zimbabwe. According to the central bank, the deteriorating balance of trade position has also combined with net service and income payments to culminate in the incurrence of unsustainable current account deficits amounting to 19,3%, 23,1% and 29,9% of GDP for 2009, 2010 and 2011, respectively.

On the positive side, the capital account rebounded to surplus levels in 2010 following a deficit of US$623,5 million in 2009 to a surplus of US$1,566 million in 2011 largely on the back of increased access to both short-term and long-term offshore credit lines mainly secured by the private sector. Recently the PTA bank revealed that in the last five years it had extended over US$600 million in lines of credit to Zimbabwean companies.

Against the background of an unsustainable current account deficit and inadequate capital account inflows, the country’s overall balance of payments position improved from a deficit of US$1,865 billion in 2009 to a deficit of US$615 million in 2011. Due to depleted foreign currency reserves and lack of balance of payments support, the country continues to finance its deficit through the accumulation of external payment arrears largely on official external debt obligations falling due.

Various policy recommendations have been put forward by analysts who argue that the current trend on the current account needs to be urgently reversed. In the short-term the country needs to put mechanisms to ensure that it earns a fair value for its mineral and natural resource wealth.

Commentators argue that prominence should be given to the establishment of production facilities that enable the country to weave its own cotton into finished shirts, process its tobacco into cigarettes, polish its own diamonds and beneficiate them into high value jewellery, and also refine its own platinum, among other possibilities which can be explored to add value to our primary products.

This was noted in the recently announced Trade and Industrial Development Policies launched by Government on 29 March 2012, coined their shared theme as “Promoting Value Addition for Sustainable Development.”

The Reserve Bank says the growing preference for imported consumptive goods by Zimbabweans households has reached alarming and counter-productive levels.
“The growing appetite for imports is not promotive of the revival of the country’s manufacturing sector, which is struggling to find its foothold. Other countries in the region such as South Africa recently moved in to discourage the dumping of products such as chickens from Brazil, to protect their local industry. In this regard, import tariffs ranging from 6,26% to 62,93% have been imposed as anti-dumping measures  on low quality chicken products from Brazil,” the bank says.


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