Current account deficit to narrow, says BMI

Source: Current account deficit to narrow, says BMI | The Financial Gazette February 16, 2017

A LONDON–BASED research firm has predicted an improvement in the country’s current account deficit this year, forecasting a surge in export earnings during the calendar and an improved liquidity position following major monetary reforms that ushered in a new currency in the country.
BMI Research said economic growth, which will ride on mineral and tobacco exports, should still be augmented by “painful” reforms to stem a huge import bill estimated to be draining US$7 billion annually.
The current account deficit is estimated at about US$3 billion, which means that the country is sitting on an unhealthy macro-economic situation whereby the value of imports is greater than exports.
In the report, BMI projected that the current account deficit would drop to 5,6 percent of gross domestic product (GDP) this year, before declining further to 5,4 percent in 2018.
Zimbabwe’s GDP is estimated at about US$14 billion.
The current account deficit averaged 14,8 percent of GDP between 2011 and 2016.
This figure is higher than the Southern African Development Community’s nine percent benchmark.
“An increase in export revenues will alleviate some of the pressures on the Zimbabwean economy over 2017, as rising tobacco prices and production go some way towards addressing the shortage of hard currency that has constrained economic growth over the past two years,” BMI said.
“Having been stricken by a severe drought in 2016, we believe harvests of Zimbabwe’s main export, tobacco, will improve over the coming months as weather conditions become more conducive to agriculture… (That), coupled with an improvement in the output of other exporting industries, means we expect exports to grow by 3,0 percent in 2017 after several years of decline.
“(But) such is the degree of Zimbabwe’s import-dependence that any increase in hard currency will soon be lost to goods and services brought in from abroad. This will slow the rapid pace at which the current account deficit has narrowed since 2013,” said BMI.  The price of gold, a key source of foreign exchange, is still struggling to reach the US$1 895 per ounce price registered during booms times in 2011.
However, prices, including those of platinum, have recently crawled back, after hitting record lows in 2015.
Local analysts appeared to support BMI’s projections, saying rising export revenues would complement measures announced by government including Statutory Instrument 64 of 2016, which banned the importation of several product lines to reduce the import bill, boost domestic product consumption and stabilise the trade deficit, a major component of the current account.
A Confederation of Zimbabwe Industries (CZI) Manufacturing Sector Survey said in November that capacity utilisation in the sector rose by 13,1 percentage points to 47,4 percent in 2016, from 34,3 percent in 2015.
It said the recovery had been buoyed by the import ban imposed to protect the beleaguered industrial sector.
“The gains of Statutory Instrument 64 of 2016 are beginning to be realised,” said CZI.
BMI said reforms on the monetary front would also help the country.
In November, the central bank introduced bond notes to alleviate the liquidity crisis.
The domestic currency has slowly evolved into the major medium of exchange in the past three months, although a foreign currency black market to trade the bond notes for greenbacks has emerged.
The stock of United States dollars circulating in the economy has dropped due to lack of confidence in the banking sector as well as imports.
“We see this (introduction of bond notes) as a means of slowly de-dollarising the economy, albeit one that is not officially acknowledged as such, which will likely continue over the coming months. We expect an increasing proportion of the country will begin incorporating the bond notes into their economic activity as they look to reserve hard currency for imported goods. While increasing export revenues in 2017 will offer some relief to the crisis-hit economy, they will offer no escape from the necessary and painful reforms the country will undergo over our short-term outlook,” said BMI.
“Should the government successfully follow through with the de-dollarisation process and establish a weaker exchange rate to the US dollar, then we would likely see some improvement in the country’s exporting sectors and balance of payments dynamics. However, at best, such a process will be both timely and politically expensive as the impact of a weaker exchange rate feeds through into higher prices and decline in living standards that would echo the years building up to hyperinflation in the mid-2000s,” the report added.
BMI’s report is one of only a few research findings that have given Zimbabwe a chance to recover, even as industrial production remains tepid.
In January, the London-based IHS issued said worsening internal fights within the ruling ZANU-PF’s factions, which have been competing to succeed President Robert Mugabe could affect prospects for recovery.
In October last year, the International Monetary Fund said in its World Economic Outlook that Zimbabwe’s economy would register negative growth of -0,3 percent and -2,5 percent in 2016 and 2017, respectively, hence sliding into recession.
A report presented by one of the country’s leading economists, Ashok Chakravat in January painted a gloomy picture of the liquidity crisis, saying Zimbabwe required over US$900 million in cash to curb the liquidity. He also averred that current measures to stem the crisis were inadequate.
Moody’s, the global rating agency, warned at the end of last year that the worsening cash crisis and excessive State borrowing on the domestic market would strain the financial system.