BY ZVIKOMBORERO SIBANDA
OVER the past two decades, Zimbabwe has significantly regressed on the economic front. A country which was once a strong manufacturing hub and a food basket for the region has reduced itself to a net importer of almost everything.
The pursuit of populist policies by the late former president Robert Mugabe administration plunged the economy into debt default. The irony is that most of the accumulated debt was used on current consumption at the expense of future consumption.
There is a growing number of economists who sees it as morally wrong to accumulate more debt to finance current consumption as it burdens unborn future generations who will have to repay for what they did not benefit from. Also, there is interest to be paid on contracted debt annually. As such, there is need to invest in projects that have large long-term economic dividends.
Zimbabwe debt level has reached unsustainable levels currently estimated at over 70% of its gross domestic product (GDP). Generally, high debt lowers national savings and income and reduces the ability of a country to respond to crises.
Most developing nations lack deep financial markets to sustain local credit demand. This is why cheap finance from international financial institutions (IFIs) is critical for their robust development. However, from the early 2000s Zimbabwe cannot fully access such credit lines. Over the years, the country has been relying mostly on high interest bilateral facilities thus contributing to economic decline.
Faced with numerous domestic programmes against limited financing, the Reserve Bank of Zimbabwe (RBZ) was roped in to help the central government, what are known as quasi-fiscal activities. Between 2000 and 2008, hundreds of billions of Zimbabwean dollars were pumped in the economy via RBZ leading to excessive liquidity growth thus affecting the stability of the local currency. Consequently, inflation ballooned to million percent, levels not seen before for a country in peacetime.
The dollarisation reform of 2009 threw an economic lifeline, as prices started to stabilise. The rebirth of macro-economic stability, thanks to the use of the greenback and sustainable fiscal spending, lured investors. For instance, portfolio investment ballooned as foreign participation on the local bourse, the Zimbabwe Stock Exchange (ZSE), increased.
By the end of 2009, industrial capacity utilisation as measured by the Confederation of Zimbabwe Industries (CZI) recovered to 32,3% from under 10% in 2008. It reached a new high of 57,2% by 2011. CZI’s capacity utilisation statistics measure activity in the domestic manufacturing industry, one of key gauges of economic growth.
Nevertheless, starting in 2012, production and productivity in the manufacturing sector began plummeting till it reached a new low of 34,3% in 2015. This decline indicates the negative impact of using a hard currency like the United States dollar by a small economy.
Let me keep it in simple terms for some of you:
For some time now, the largest trading partner of Zimbabwe is South Africa. For instance, latest ZimStat trade statistics show that US$225,97 million of US$489,86 million April 2021’s imports originated from South Africa while US$176,36 million of US$444,66 million April 2021’s exports were destined for South Africa.
The second top country to absorb Zimbabwe’s products was the United Arab Emirates (UAE) at US$112,38 million followed by a bunch of unspecified countries with a combined US$111,79 million. The economic relationship between the two countries is by geographic design.
So, when Zimbabwe was using the US dollar, the South African rand was weaker against the greenback. This made South African-made goods cheaper in the eyes of Zimbabweans while making it expensive for South Africans to buy from Zimbabwe. This rendered Zimbabwean manufacturing firms uncompetitive against foreign firms. Actually, they suffocated from an influx of cheap imports and as we know, a rational consumer always strives to maximize utility.
In the end, Zimbabwe suffered the worst trade deficit during the dollarisation period. A trade data analysis done by a financial media company, Equity Axis, found that the country recorded an average deficit of US$2,5 billion annually between 2009 and 2018. This destroyed our local industry as evidenced by southward trending annual capacity utilisation rate.
Back to my story, it is critical for a developing country to have its own currency. However, the issue is not only about having a currency in name only but that currency must be stable. In 2019, the year the country officially re-introduced the Zimbabwean dollar, the local currency was in trouble.
It depreciated by over 85% leading to massive price increases. Inflation closed the year at 521% from under 43% in December 2018. This environment affected business activity as industrial capacity utilisation nosedived to 36,4% from 48,2% in 2018.
With a weaker currency in 2019, Zimbabwe recorded its lowest trade deficit since dollarisation reform. Yes, lower incomes due to hyperinflation contributed to a larger extent, but a lower Zimdollar deserve a mention among the rest.
Fast forward to 2020 when the government introduced policy measures, which helped to clamp runaway exchange rate and skyrocketing prices, domestic manufacturing significantly improved. The Confederation of Zimbabwe Industries (ZDI) estimates show that industrial capacity utilisation increased by 11 percentage points to 47% in 2020. In the same year, a sustainable trade deficit of about US$600 million was attained slightly higher than a deficit of US$500 million in the prior year.
There are many other probable factors to explain the causes of favorable trade deficit and a relatively higher capacity utilisation rate in 2020. But also, evidence exists to support my view that a stable domestic environment with local currency in use is good for domestic industry and the economy at large. Using a weaker but stable Zimdollar gives domestic firms competitive advantage than when using a strong US dollar as sole legal tender.
Government should implement prudential market policies and work towards further improvement of the Zimdollar and prices. When the Zimdollar is stable, prices will stabilise, producing an investment-friendly environment.
Then domestic production will rise, thereby, reducing Zimbabwe’s overdependence on imports. When we are using the US dollar, our businesses will be fighting with foreign rivals with one hand tied.
Also, stable local currency gives government an extra policy arm (monetary policy) to dictate the direction of the economy. After all, there is great pride in buying lowly priced locally produced goods using a local currency. Upbeat with 2020 relative stability, manufacturing businesses expects capacity utilisation to reach 61% in 2021, the highest level since 2000.
Sibanda is an economist at Equity Axis. He can be reached at firstname.lastname@example.org