Zimbabwe’s liquidity crisis, the curse of a strong dollar


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Moreover, China is Zimbabwe’s largest foreign investor.  During the period 2009-13, China invested $1.3 billion in Zimbabwe (FDI increased from $11.2 million in 2009 to $602 million in 2013).  The increase in both China-Zimbabwe trade and investment was propelled by Zimbabwe’s strategic pivot to the East in 2013 under its “Look East policy” — a response to the US and EU imposed sanctions on individuals and state-owned entities reacting to allegations of gross human rights abuses and electoral fraud leveled against President Robert Mugabe’s administration.

Zimbabwe is heavily dependent on China for international capital inflows.  However, in 2015 China-Zimbabwe trade decreased sharply from $1.24 billion in 2014 to $462 million, and Chinese investment decreased from $238 million in 2014 to $46.53 million, reflecting the likely new normal as China’s economy looks inwards.  According to the NBS, China’s annual GDP growth slowed to 6.9 percent in 2015—its lowest annual GDP growth since 1990.  China’s economic growth is projected at 6.5 percent in 2016.

Indeed, over the last decade, China’s growth has had positive spillovers for Zimbabwe.  In particular, China’s investment led growth model generated large demand for metals, boosting Zimbabwe’s terms of trade and export volumes.   However, China is transitioning away from export and investment-led growth to a model increasingly driven by domestic consumption, with negative implications for commodity prices.

More specifically, in 2015, there was a sharp decline in the prices of precious and base metals: Gold (9 percent), platinum (28 percent), nickel (43 percent), copper (18 percent), and iron ore (42 percent).  Critically, weaker prices for precious and base metals—which account for over 50 percent of Zimbabwe’s exports—will result in lower export and fiscal revenues.

Accordingly, as China reorients itself, Zimbabwe must upgrade its portfolio of international economic relations and overcome its dependence on primary commodities.  Specifically, Zimbabwe must achieve faster and better-quality economic growth by relying on more engines of growth such as value-added agriculture and manufacturing.  Without determined action to diversify its export portfolio, revenues will continue to decline, and market liquidity will further deteriorate.

Since its introduction in 2009, Zimbabwe’s multicurrency regime—largely anchored to the U.S. dollar—has helped the country restore growth and tame hyperinflation. However, Zimbabwe still faces growth and competitiveness challenges that stem partly from persistent currency overvaluation.

The currencies of Zimbabwe’s major trade partners depreciated greatly against the U.S. dollar in 2015.  For example, the South African rand depreciated by 28.5 percent; the Botswana pula by 15 percent; the Zambian Kwacha by 42 percent; and the Mozambican metical by 31.25 percent.

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Charles Rukuni
The Insider is a political and business bulletin about Zimbabwe, edited by Charles Rukuni. Founded in 1990, it was a printed 12-page subscription only newsletter until 2003 when Zimbabwe's hyper-inflation made it impossible to continue printing.

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