A Fitch Research Company, BMI, sees Zimbabwe’s current account deficit of 0,8% of GDP in 2018 rising to 1,8% in 2019 from 0,8% in 2017 amid the international re-engagement efforts of the new administration.
In its July report, BMI noted that the country’s remittance flows would also increase, leading to a rise in the current transfer surplus, adding the net effect on the current account would be minimal given that remittance proceeds would quickly be recycled into increased imports and a wider trade account deficit.
The net effect of increased inflows on the current account balance will however be offset by the fact that they will lead to an increase in demand for imports which have been hit hard by severe foreign exchange liquidity challenges. An increase in foreign currency supply is likely to be used to buy goods from abroad.
Higher remittances are owing to the appreciation of the South African rand against the US dollar, implying that remittances will end up being converted to a larger quantity of US dollars.
The research company goes on to note that increased foreign investor and donor inflows in Zimbabwe will boost foreign exchange liquidity in the economy, leading to increased import demand and a widening of the current account deficit.
With the country set for elections on July 30, BMI added that in the event that the elections are held credibly and peacefully, inflows will likely increase in the second half of 2018.
“The new government of President Emmerson Mnangagwa has made re-engaging with foreign investors and donor partners a major priority in its plans to revive the economy, and we believe that inflows are likely to increase on bets that his government’s talk of reform will be put into action. These inflows are likely to remain relatively small in magnitude until the government has built up a track record of reform implementation,” BMI says.
“We believe that Zimbabwe is likely to see higher remittance inflows in 2018 relative to 2017 owing to the appreciation of the South African rand against the US dollar. Given that the bulk of Zimbabwe’s diaspora, estimated to number as many as 3 million people, live and work in South Africa, a stronger rand means that remittances will end up being converted to a larger quantity of US dollars, the main transaction currency in Zimbabwe.”
BMI says it believes that Mnangagwa and the ruling Zanu PF are likely to hold on to power and the economy will continue to stabilise as confidence returns.
“As such, we expect the current account deficit to rise to 1,8% of GDP in 2019 as foreign investment continues to rise, further stoking demand for imports,” BMI notes.
The report also said that Zimbabwe’s current account deficit will widen in 2018 as an uptick in inward investment increases the supply of hard currency available to purchase imports.