Current account deficit stable but vulnerable

Increased export revenue following strong tobacco harvests are helping in stabilising the current account deficit as they offset rising import demand. The current account deficit is expected to remain relatively stable this year with growth in external trade facilitated by higher tobacco production.

Financial Matters with Tinashe Kaduwo

Tobacco has traditionally been the country’s primary export, and a more successful harvest in 2017 will contribute to an increase in inflows of much-needed hard currency into the economy. The current ongoing tobacco marketing season is showing relatively firm numbers compared to the prior year and the previous seven selling seasons since 2009. The broader sub-sector performance is tapping from an above average rainfall and increased financing which followed the resolution of 99-year leases.

Latest Tobacco Industry and Marketing Board numbers at week four show that sales value and volumes have far surpassed the prior year. Sales at US$107,75 million are up 31%, while volumes at US$52,48m are 34% ahead of last year. Rejected bales at 5,94% compares favourably to last year. Average prices stood at US$2,69 compared to the US$2,75 last year. The variance is, however, coming off week-on-week. The average auction price at the US$2,70 compares favourably to US$2,69 at contract floors.

A total of 93 698 growers have registered for the 2017 season as compared to about 76 310 growers who had registered by this time last year. About 13 705 growers have sold through the auction system and 40 966 growers through the contract system. Deliveries as at week four at 452,5m kilogrammes are 34% higher when compared to 39,1m kilogrammes in the prior season.

Tobacco exports at US$206,46m are 9% higher than the same period last year and have helped stabilise the current account deficit. The government is expecting tobacco harvests to increase to 205m tonnes, up from 202m tonnes in 2016. The increase in tobacco harvests will contribute to an estimated 3,3% increase in merchandise exports in 2017 as most of the tobacco is exported. Although positive, the increase in export revenue will do little to narrow the country’s current account deficit forecasted to close the year at 5,6% of GDP in 2017, following an estimated 6,3% in 2016.

Given the country’s high appetite for imports, the increase in hard currency circulating in the economy as a result of increased export earnings may prompt increase in imports. Businesses and households may use the export revenues to import goods and services that they were unable to import last year due to the severity of liquidity and cash shortages. Furthermore, the move by the Reserve Bank of Zimbabwe to open a US dollar-denominanted nostro account with the African Export-Import Bank may provide a boost for imports. The RBZ made the move to minimise friction when paying for imported goods and this may help increase imports and slow the narrowing of the current account deficit.

Although pressures on the current account may be alleviated due to tobacco-driven export growth and lower food import pressures, it does not mark the end to the cash crisis that has limited imports growth in the economy. Expected growth in exports is not enough to supply the economy with liquidity to purchase needed goods and services from foreign supplies given the current low levels of inward investment. Imports have been kept artificially cheap in Zimbabwe since the economy dollarised in 2009, particularly as the greenback strengthened over recent years against regional currencies.

The RBZ has put mechanisms to promote the use of plastic money and fight externalisation and cash hoarding. However, continued reliance on imports and limited foreign investment implies continued dollar outflows from the country. As the dollar continues to flow out of the country, it will sustain pressure on money supply particularly the much-demanded cash and weigh on economic activity. Furthermore, while headline figures for the current account balance will remain stable, the country’s external position remains vulnerable, particularly to monetary shocks.

Kaduwo is an economist at Equity Axis. — tinashek@equityaxis.net/ kaduwot@gmail.com