News / National
Zimbabwe struggles despite huge forex inflows
17 Mar 2019 at 04:56hrs | Views
ZIMBABWE is doing fairly well in terms of foreign currency earnings compared to countries such as Rwanda and Ethiopia yet the country is struggling to meet its forex obligations, a situation which has paralysed the country's economy.
The southern African country last year received more than US$6,3 billion in foreign currency inflows compared to US$5,5 billion received during the same period in 2017, representing a 13,9% increase.
By any measure, US$6 billion is a huge amount of money.
The figure includes about US$4,3 billion in exports, which compares favourably to other countries on the continent.
For instance, Ethiopia, with a population of 105 million, received $1,8 billion from export proceeds in 2018, while Rwanda, with a population of 12,21 million, generated $2 billion worth of exports.
Surprisingly, these countries seem to be doing well in terms of managing their forex while Zimbabwe, with a population of less than 14 million is even struggling to meet its forex demand for fuel imports.
Why then are we not able to meet our foreign currency requirements if we are generating that much?
Analysts point to the country's huge appetite for foreign products.
Zimbabwe imports a number of things that could be produced locally. For instance, the country imports toothpicks, water, diapers, grain, just to mention a few.
Economic analyst John Robertson said there was need for government to revive the country's agriculture sector to cut the import bill.
"Rwanda exports more than it imports and Ethiopia has a negative balance, but this is under control because of capital account inflows.
"Zimbabwe imports billions of dollars worth more than it exports, so our trade balance is out of control."
"The government wrecked agriculture and since then, only tobacco has recovered.
"We have had to import food every year for the past 17 to 20 years.
"Maize, wheat, soybeans and even fresh vegetable imports have cost billions that we should never have had to spend on imports.
"Also, we frightened away investors, so the amount that has come in on capital account has been smaller than needed to rebuild industry."
Currently, Robertson said, fewer people had a formal job than in 1980, but since then the population has more than doubled.
He said if the country's growth had not been reversed by government policies, by now there might have been 2,5 million people with formal jobs.
"Instead, we have about 800 000 formal employees. Imagine what we might be producing and exporting if businesses were employing an extra 1 800 000 and people were making goods for export and supplying most of the finished goods we need," he said.
"It is not putting farmers back onto land over which they have security of tenure and on which they can plan good farming operations.
"We will have to carry on importing food until we get back to efficient farming methods on land that is owned by farmers."
Economic analyst Persistence Gwanyanya concurred with Robertson that the underperforming manufacturing sector had made the country import-reliant.
"The challenge is how the forex is utilised. We are a consumptive economy, which is largely dependent on imports. So whilst we have generated more, we also used more as a country.
"That's why we have a trade deficit year in year out. But you would want to know why are we consumptive, why are we import-dependent. We are like that because we don't have an industry.
"The country experienced massive deindustrialisation, which meant that we cannot feed our own people with our local production.
"Local production is lower than what is required to sustain the economy.
"That's the major problem with Zimbabwe. But the other problem, you find that the foreign currency is generated by a few commodities, I think five of them contribute about 85% of the country's foreign currency - gold, platinum, tobacco, chrome and diamonds.
"These contributors have not been willing to release their foreign currency into the market simply because of the exchange rate mechanism that we were using then (mechanism of 1:1 parity between the bond, RTGS and the US$) which we recently abandoned."
Industry and Commerce minister Nqobizitha Mangaliso Ndlovu told a recent business meeting that the problem was not about how much foreign currency the country generates, but how efficiently uses the money.
He said out of the US$230 million, on average, foreign currency that was allocated by the Reserve Bank of Zimbabwe (RBZ) every month, more than half of it was set aside for the importation of three products.
These are fuel ($80 million), cooking oil ($20 million) and electricity ($20 million).
"It is important for local manufacturers to optimise the country's scarce foreign currency by maximising local procurement of raw materials," he said.
"It is also important that the business community, retailers, wholesalers and so on support local production and initiatives by organisations such as Buy Zimbabwe."
Reginald Shoko, a Bulawayo-based economic analyst, said Zimbabwe was being weighed down by a strong parallel market.
"Our biggest challenge is that our foreign currency is in the parallel market, with minimum contribution to the formal economy," he said.
"I would like to believe we don't really have a challenge of forex, but that the challenge is getting the foreign exchange currency in the parallel market getting into the formal market.
"The current interbank system will be of help, but is not a panacea as it excludes the ordinary citizenry who are recipients of forex from the diaspora leaving them to the limited avenue of bureaux de change.
"The confidence deficit in the banking sector is not helping matters."
Gwanyanya, however, argued that the interbank system would need to offer an incentive to encourage the movement of foreign currency from the parallel market into the formal system.
"They are not releasing that foreign currency into the market because they have now come up with structures that will sustain them," he said.
"So if you want now to take them away from those structures, you need to come up with a strong credible incentive mechanism.
"The rate we have in the interbank foreign exchange market is not high enough to entice the market from their current ways of accessing foreign currency and the prices at which we are accessing the forex.
"There is also lack of trust of the system from the market.
"We lost trust long ago and we need to restore that trust in the banking system. That actually hinders the flow of foreign currency."
The southern African country last year received more than US$6,3 billion in foreign currency inflows compared to US$5,5 billion received during the same period in 2017, representing a 13,9% increase.
By any measure, US$6 billion is a huge amount of money.
The figure includes about US$4,3 billion in exports, which compares favourably to other countries on the continent.
For instance, Ethiopia, with a population of 105 million, received $1,8 billion from export proceeds in 2018, while Rwanda, with a population of 12,21 million, generated $2 billion worth of exports.
Surprisingly, these countries seem to be doing well in terms of managing their forex while Zimbabwe, with a population of less than 14 million is even struggling to meet its forex demand for fuel imports.
Why then are we not able to meet our foreign currency requirements if we are generating that much?
Analysts point to the country's huge appetite for foreign products.
Zimbabwe imports a number of things that could be produced locally. For instance, the country imports toothpicks, water, diapers, grain, just to mention a few.
Economic analyst John Robertson said there was need for government to revive the country's agriculture sector to cut the import bill.
"Rwanda exports more than it imports and Ethiopia has a negative balance, but this is under control because of capital account inflows.
"Zimbabwe imports billions of dollars worth more than it exports, so our trade balance is out of control."
"The government wrecked agriculture and since then, only tobacco has recovered.
"We have had to import food every year for the past 17 to 20 years.
"Maize, wheat, soybeans and even fresh vegetable imports have cost billions that we should never have had to spend on imports.
"Also, we frightened away investors, so the amount that has come in on capital account has been smaller than needed to rebuild industry."
Currently, Robertson said, fewer people had a formal job than in 1980, but since then the population has more than doubled.
He said if the country's growth had not been reversed by government policies, by now there might have been 2,5 million people with formal jobs.
"Instead, we have about 800 000 formal employees. Imagine what we might be producing and exporting if businesses were employing an extra 1 800 000 and people were making goods for export and supplying most of the finished goods we need," he said.
"It is not putting farmers back onto land over which they have security of tenure and on which they can plan good farming operations.
"We will have to carry on importing food until we get back to efficient farming methods on land that is owned by farmers."
Economic analyst Persistence Gwanyanya concurred with Robertson that the underperforming manufacturing sector had made the country import-reliant.
"The challenge is how the forex is utilised. We are a consumptive economy, which is largely dependent on imports. So whilst we have generated more, we also used more as a country.
"The country experienced massive deindustrialisation, which meant that we cannot feed our own people with our local production.
"Local production is lower than what is required to sustain the economy.
"That's the major problem with Zimbabwe. But the other problem, you find that the foreign currency is generated by a few commodities, I think five of them contribute about 85% of the country's foreign currency - gold, platinum, tobacco, chrome and diamonds.
"These contributors have not been willing to release their foreign currency into the market simply because of the exchange rate mechanism that we were using then (mechanism of 1:1 parity between the bond, RTGS and the US$) which we recently abandoned."
Industry and Commerce minister Nqobizitha Mangaliso Ndlovu told a recent business meeting that the problem was not about how much foreign currency the country generates, but how efficiently uses the money.
He said out of the US$230 million, on average, foreign currency that was allocated by the Reserve Bank of Zimbabwe (RBZ) every month, more than half of it was set aside for the importation of three products.
These are fuel ($80 million), cooking oil ($20 million) and electricity ($20 million).
"It is important for local manufacturers to optimise the country's scarce foreign currency by maximising local procurement of raw materials," he said.
"It is also important that the business community, retailers, wholesalers and so on support local production and initiatives by organisations such as Buy Zimbabwe."
Reginald Shoko, a Bulawayo-based economic analyst, said Zimbabwe was being weighed down by a strong parallel market.
"Our biggest challenge is that our foreign currency is in the parallel market, with minimum contribution to the formal economy," he said.
"I would like to believe we don't really have a challenge of forex, but that the challenge is getting the foreign exchange currency in the parallel market getting into the formal market.
"The current interbank system will be of help, but is not a panacea as it excludes the ordinary citizenry who are recipients of forex from the diaspora leaving them to the limited avenue of bureaux de change.
"The confidence deficit in the banking sector is not helping matters."
Gwanyanya, however, argued that the interbank system would need to offer an incentive to encourage the movement of foreign currency from the parallel market into the formal system.
"They are not releasing that foreign currency into the market because they have now come up with structures that will sustain them," he said.
"So if you want now to take them away from those structures, you need to come up with a strong credible incentive mechanism.
"The rate we have in the interbank foreign exchange market is not high enough to entice the market from their current ways of accessing foreign currency and the prices at which we are accessing the forex.
"There is also lack of trust of the system from the market.
"We lost trust long ago and we need to restore that trust in the banking system. That actually hinders the flow of foreign currency."
Source - the standard
