Huge import bill constraining economic growth

Zimbabwe’s huge import bill is constraining the country’s economic growth potential and the situation is being worsened by illicit financial flows out of the country, Central Bank governor John Mangudya said in his monetary policy statement last week.

Exports declined from $2.8 billion in 2014 to $2.5 billion last year. Though imports also declined from $5.9 billion to $5.5 billion, this left a deficit of $3 billion.

Mangudya said the country lost $1.8 billion through illicit flows.

“The country’s import absorption remains high relative to export performance, a development that has undermined efforts to sustainably build adequate foreign exchange reserve buffers and improve domestic money supply conditions,” the central bank chief said.

“More significantly, a huge import bill has essentially drained foreign exchange resources realized from exports, credit lines, and remittances, thereby further tightening liquidity conditions with constraining effects on economic growth potential.

“The sustained excess of imports over exports is exacerbated by the incidences of IFFs that impose a constraint on current account performance, which has continued to record sizeable deficits over the past few years. The country is consuming much more than it is producing and hence a current account deficit.”

Exports remained the dominant source of market liquidity contributing 59 percent over the period 2009 to 2015, followed by international remittances which contributed 29 percent to total foreign exchange inflows.

Diaspora remittances amounted to $935 million last year, about 48 percent of total remittances which were about $2 billion.

Below is the section on Balance of payments developments from Mangudya’s monetary policy statement.

Within the context of the multi-currency system, the levels of liquidity in the national economy largely depends on the balance of payments developments (BOP). This is why the Zimbabwean economy is referred to as an open economy. It is open to, and strongly influenced by, outside economic factors which are components of the balance of payment i.e. exports, imports, diaspora remittance, capital inflows, etc.

The broad components of the BOP or balance of international payments, represent a summation of the country’s current demand and supply of the claims on foreign currencies and of foreign claims on its currency.

The transactions include payments for the country’s exports and imports of goods, services, financial capital and financial transfers. When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. A BOP surplus (or deficit) is accompanied by an accumulation (or decumulation) of foreign exchange reserves by the Central Bank.

The key is for the country to put in place measures to plug the leakages in order to increase foreign exchange reserves and in so doing increasing liquidity.

• Foreign currency inflows contribute positively to the stock of forex in the country.
• Foreign currency outflows deplete the stock of foreign currency in the country.
• Economic transformation requires “a plugging the leakages approach” to mitigate against the export of liquidity through IFFs, trade mispricing and unsanctioned unproductive investments.

Reflecting the effects of the downturn in international commodity prices and the deceleration in economic activity in Zimbabwe, merchandise exports for the period January to November, 2015 declined by 12.2% from US$2.8 billion in 2014 to US$2.5 billion in 2015.

Concomitant with the slowdown in economic activity, and widespread industrial under-capacity utilization, imports declined by 5.8% from US$5.9 billion for the period January to November 2014 to US$5.5 billion over the corresponding period in 2015.

Despite the slowdown in total merchandise trade, imports surpassed export revenues culminating in the incurrence of a trade deficit in 2015. This resulted in the marginal worsening of the trade balance by a marginal 0.3%, from a deficit of US$3.02 billion recorded during the period January to November 2014 to a deficit of US$3.03 billion in 2015.

The country’s import absorption remains high relative to export performance, a development that has undermined efforts to sustainably build adequate foreign exchange reserve buffers and improve domestic money supply conditions. More significantly, a huge import bill has essentially drained foreign exchange resources realized from exports, credit lines, and remittances, thereby further tightening liquidity conditions with constraining effects on economic growth potential. The sustained excess of imports over exports is exacerbated by the incidences of IFFs that impose a constraint on current account performance, which has continued to record sizeable deficits over the past few years. The country is consuming much more than it is producing and hence a current account deficit.

On the capital account, surpluses realized were underpinned by reliance on private sector debt creating capital flows. The capital account, however, slowed down reflecting the effects of debt repayments falling due and subdued foreign direct investment inflows. Capital and current account developments in 2015 culminated in the deterioration in the overall balance of payments deficit from US$40.3 million in 2014 to an estimated deficit of US$385.8 million in 2015.

Evidently, exports remain the dominant source of market liquidity contributing 59% over the period 2009 to 2015, followed by international remittances which contributed 29% to total foreign exchange inflows. External loans and income receipts has remained relatively low.

In 2015, Diaspora remittances amounted to USD935 million which is about 48% of total remittances which were about USD2 billion.

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