Zimbabwe's balance of payment unlikely to improve, says Moody's

International investor service Moody's has said that the balance of payments situation in Zimbabwe is unlikely to improve in the next 12-18 months' in spite of the Reserve Bank of Zimbabwe's efforts with the export incentive and the push towards productivity.

In a note, Drivers and Credit Implication of Zimbabwe's Cash and Liquidity Shortages, Moody's says with the exception of gold, the country's main exports platinum and tobacco remain depressed and output volumes are unlikely to increase significantly due to capital constraints. At the same time low commodity prices will restrict inbound FDI as the country is a primary producer while the persistent cash shortages are hampering financial intermediation.

"This is turn damages growth, dampens Government revenues and further increases reliance on the banking sector to meet the shortfall"

Moody's says that the BoP situation will be difficult to resolve without external intervention and comprehensive reforms noting, however, that the payment made to the International Monetary Fund to clear $107,9 million arrears, is a first but important step towards normalisation of relations with IFIs which once fully in place will open the possibility for concessional loans.

Moody's says with long standing balance of payments pressures; dollar shortages are likely to rise.

There is a non-negligible risk of additional foreign exchange controls – particularly in key export industries – such as a shift to full transfers of export earnings to the central bank's nostro accounts.

There is also a material risk of payment delays from counter-parties in Zimbabwe, with balances in nostro accounts falling.

"Delays in receiving cross-border payments, including debt servicing may occur among even fundamentally strong local counter-parties."

Further to that, impaired financial intermediation will weaken economic activity.

"Besides stagnating private sector credit growth, an inability to obtain sufficient cash for daily transactions will slow growth, in turn lowering Government's revenues."

Zimbabwe has been running structural current account deficits since dollarisation in 2009. These deficits, alongside weak capital inflows have led to a steady drain of dollars out of the economy.

Although the new foreign exchange controls implemented this year may lead to import compression, they are unlikely to alleviate the cash shortages outright.

The cash shortage is also hampering financial intermediation in turn damaging growth, dampening government revenues and further increasing reliance on the banking sector to meet the shortfall.

The report notes that internal devaluation, currently being pushed by industry and the central bank is politically and economically unfeasible.

"The Government has so far not announced any major structural reforms including measures aimed at internal devaluation. The sheer scale of internal devaluation required (at least 20 percent) makes it politically and economically unfeasible."