ZIMBABWE is yet again at a cross roads given the precarious foreign currency dynamics at play. There is an opportunity to reconfigure the country after years of misconfiguration, particularly on the balance of payment (BOP) position.
For years, the country has struggled to strike balance between growth and stability. In 2018, for example, fissures in the market had resulted in observable price distortions and stratas, at a time the government maintained that the economy was fully dollarised.
Injection of incessant volumes of Treasury Bills (TBs), resulted in the rebirth of the Zimbabwean dollar, fueled by the bond notes, which within a short space of time, began to lose value at a greater speed, against physical US dollar cash. Other electronic funds such as RTGS and mobile also carried varying values, with retailers charging various rates for different forms of payments.
While this was happening, Zimbabwe began to enjoy fairer economic growth rates, particularly in 2018 of between 4% and 6% after years of very poor growth rates.
In our constant write ups to clients at the respective time, we warned that the growth was fueled by excessive money supply growth, emanating especially from TBs, and therefore not sustainable nor should it have been praised.
At peak levels, TBs stocks totaled US$8 billion, partially lower than the country’s external debt levels. Combining both domestic and foreign debt levels at the respective time would give a total of about US$20 billion, a figure at par with the country’s GDP. This was clearly unsustainable.
Government continued to spend outside its budgetary limits forcing the RBZ to grossly subsidise the market, at the expense of exporters.
These phenomena are well documented in Zimbabwe and no sane banker or economist within the jurisdiction should fall into the same trap as in the hyperinflationary era of former Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono.
With low foreign currency reserves, a weak GDP growth and external position, monetary expansion, should mainly come from without and not within. Sweating the local alternatives, results in an overheating economy given the forming economic bubbles.
Quantitative easing and monetary expansions such as bailouts can only be applied where currency stability is guaranteed. In the US and the rest of the developed world, strong BOP and GDP positions, cushion the underside of monetary injections.
For weaker economies, this option often leads to hyperinflation. Zimbabwe has gone through this unbearable experience, twice and it should not be repeated.
Latest data from Zimstat shows that exports are currently growing at the fastest speed in recent history, which is a positive the country can take advantage in a bid to reposition on a sustainable basis.
For the six months period to June, exports totaled US$2,52 billion, which is its best performance in 10 years. A resurge in gold production and price recovery in the face of uncertainty underpins the growth especially in the later period of the first half. The biggest driver of earnings has been nickel mattes, which essentially compose of Platinum Group Metals. These group of metals have seen a combined twice-fold increase in income, based on global price surges.
A raft of other minerals include ferrochrome, diamonds and nickel have also seen a surge in prices and therefore net earnings increase for the country. Most of these factors have largely been exogenous.
Company-specific fundamentals have played a small role in driving the earnings surge. With companies, production growth is the key control variable, which across the aggregates reviewed above, is not seen as the key contributor.
In some instances, such as gold exports, Zimbabwe missed a chance given a strong 2020 rally. This is at a time government tinkered with legislation and deterred deliveries given the punitive payment modalities. The performance of exports in the period under review is of significant impact.
At this rate, the annual performance will come in at the best level in since 2009. Even so, it will increase the margin of BOP balance in the positive ahead of the prior year, given a more than 30% increase in remittances in the same period ahead of the prior year.
What is even more significant with respect to Zimbabwe’s exports is that whereas a good fraction is in minerals, the minerals are varied and pushed by different global markets dynamics.
Some of the metals are used in construction of infrastructure while others are used in vehicle manufacturing, battery technology, hedging, etc. This means that there is diversification of minerals and thus low volatility in income earned.
However, the country is still earning less because of low beneficiation, which is not the subject of this write up.
What is revealing from these statistics is that country’s exports are performing at record levels in years, which is a combination of both exogenous and endogenous factors. We are of the view that most of the factors are external.
However, there is a fair contribution emanating from local companies and the RBZ in terms of ensuring a smoother flow of operations, which cannot be overlooked.
Our view is that these efforts are not being replicated with respect to allocation of forex and efforts to preserve value of local currency, factors which may harm exports if mismanaged.
The current exports level buttressed by a higher nostro position are factors that can be leveraged to drive stability. Further liberalisation of the exchange rate is one factor that can help redeem stability and this can be supported by discretionary base money management.
At present, the exchange is not liberalised hence the widening gap between the formal and informal market. Liberalization naturally leads to equilibrium, and this can be done on a gradual basis not to disrupt the current stability.
Further, government need to manage its expenditure, which has clearly caused influx of Zimdollar currency on the market and given its fragility and less preference, could drive the exchange rate further — haywire.
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