adminDr Gift Mugano
Since the adoption of multiple currencies Zimbabwe has faced a new menace in the form of a liquidity crunch. This disease seems to be going nowhere anytime soon. Against this background, this week’s issue seeks to unpack the root causes of liquidity crunch in Zimbabwe.For starters, the key sources of liquidity under a dollarised environment are exports, foreign direct investment (FDI), aid and remittances. The root causes of liquidity crunch are centred on these four main sources of liquidity.
Export Performance
Table 1 shows how Zimbabwe’s exports performed from 2009 to 2015. From the table, one can easily see that our exports by and large are generally low.
In the year 2009, we exported goods worth $2,2 billion. Subsequent exports were $3,2 billion, $3,6 billion, $3,6 billion, $3,5 billion, $3,1 billion and $2,7 billion for the years 2010, 2011, 2012, 2013, 2014 and 2015, respectively.
On the other hand, imports were on average twice the value of exports on a yearly basis. In 2009, Zimbabwe registered imports valued at $6,2 billion.
In subsequent years, annual imports were amounting to $5,9 billion, $8,6 billion, $7,5 billion, $7,7 billion, $6,4 billion and $6 billion for the years 2010, 2011, 2012, 2013, 2014 and 2015, respectively.
What is very clear from table 1 is that because we are importing more than we are exporting, we consistently registered trade deficits on a yearly basis amounting to $4 billion, $2,6 billion, $5 billion, $3,6 billion, $4,2 billion, $3,3 billion and $3,3 billion for the years 2009, 2010, 2011, 2012, 2013, 2014 and 2015, respectively. Cumulative figure of trade deficit up to 2015 is totalling $26 billion which is ironically enough to fund the requirements in the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZIM-ASSET).
From a liquidity analysis point of view, it is clear that incessant trade deficits are one of the root causes of liquidity crunch. We have turned our economy into a till machine for both the region and international community. We must reverse this!
In order to put in place policy measures aimed at reversing the trade deficit we must first seek to understand what constitute both our exports and imports and then take a closer look at which imports can we substitute.
Zimbabwe Major Exports
Table 2 shows Zimbabwe’s major exports in 2015.
Although I picked 2015, the export composition is consistently the same since 2009.
What is clear from this table is that we largely export raw materials which does not fetch significant earnings in the export market.
More so, the same exports are susceptible to the vulnerability of prices in the world markets.
To make matters worse, our exports, unlike in the 1990s period, are longer diversified.
From this table, about four products constitute our exports, that is, tobacco, minerals (this combines precious metals, ores and iron and steel), sugars and cotton constituting 85 percent of total exports.
We must work on reviving the yester year’s industries and obviously work very hard on value addition and beneficiation as enunciated in the Zim-ASSET. What is requires to do is to work very hard in attracting FDIs targeted for sectors which requires value addition.
We can start work on value addition of the commodities shown in table 2 since these are our dominant exports.
Zimbabwe’s Major Imports
Table 3 shows Zimbabwe’s major imports for the year 2015. Again, the configuration of imports is consistent in recent years.
On the top list of our major imports is minerals, oils and distillation products amounting to $1.840 billion in 2015.
This is followed by machinery and equipment, motor vehicles, cereals, electricals, pharmaceuticals, plastics and fertilisers with imports value of $559 million, $460 million, $410 million, $403 million, $231 million, $203 million and $169 million, respectively.
All these imports constitute 71 percent of our total imports in 2015. In all these import categories we have companies which are actually producing these products.
If we work hard in reducing these imports by supporting local products by enacting the local content policy and supporting these companies through a financial facility. I am happy that the Ministry of Industry and Commerce is working on promulgating local content into law.
However, we don’t want to wait for the law to come into place especially on Government procurement. It just requires moral suasion. I have said it over and over that we want to see our Government together with its parastatals deliberately buying local cars, local fertilisers for programmes like Command agriculture, etc.
Foreign Direct Investment
FDIs plays a critical role in injecting cash into this economy. Figure 1 shows trends in FDIs coming to Zimbabwe on an annual basis dollarisation.
From the diagram, Zimbabwe witnessed a steady increase of FDIs from 2009 to date but still not good enough to both move this country forward and match with our regional peers. On average, Zimbabwe’s FDI receipts is around 10 percent of the regional countries like Mozambique and Angola.
To make matters worse, some of these investments especially in the retail sector are quite extractive since they are meant to perpetuate continuous siphoning of monies from this country. I have noted that supermarkets, for example, they come to establish here without a local beneficiation plan.
One will then see a situation of commodities where commodities from Polokwane and Kwazulu Natal are flooding South African owned shops at the expense of locally produced goods. Yes our local products are quite expensive due to low productivity. Farmers, for example, can only become competitive if they are supported both financially and capacity wise.
We have seen it in tobacco, beverage industries and seed industries. The tobacco sector has seen our farmers being able to internationally compete thanks to contract farming by players in the tobacco industry.
Delta Beverages and seed houses like Seed Co and Pannar have become household names in their respective industries powered by farmers they supported over the years. Here, I am trying to demonstrate a business case for local procurement and therefore the need to apply local content policy on FDIs as well.
Aid and Remittances
Aid and remittances are critical sources of liquidity. Figure 2 shows the performance of aid (humanitarian assistance) and diaspora remittances since dollarisation.
Figure 2: Aid and Remittances ($Million)
Both humanitarian assistance and diaspora remittances make up total transfers coming to this country. From figure 2, total transfers increased from around $1 billion in 2009 and reached a maximum of around $1,7 billion in 2012 and then become flat thereafter.
These numbers are again not enough to propel this country forward. What is worse is that the aid coming through is largely humanitarian not developmental aid. So aid like food aid can only save our life not spur development. The issue of getting developmental aid can only be a reality if we clear our debt. I am happy that the Minister of Finance is handling this matter very well. I will not therefore delve much into this matter all I can do is to wish him luck.
I will focus on measures we can put in place to increase diaspora remittances which is much more in our control.
Fostering the role of micro-finance
institutions
Zimbabwe, as in the case of other African countries, due to exclusivity agreements, the remittance market is currently dominated by Western Union and Money Gram, two leading global transfer companies.
These two companies control 65 per cent of all remittances pay-out locations in Africa, in partnership with selected commercial banks and other financial institutions. This dominance has been reinforced by tacit restrictions imposed by African countries on companies that can offer remittance services.
Lack of competition has translated into higher transfer costs. For instance, in Africa costs are still 25 percent higher than in Latin America and Asia, which have experienced marked reduction in costs. In Zimbabwe, the transfer fees are around 20 percent. This is very high.
To overcome the challenge of high transfer costs, Government must work on fostering the involvement of smaller organizations such as micro-finance institutions and post offices to facilitate transfer of remittances. This may improve access to remittance transfers by the poorest especially in rural areas as micro-finance institutions and post offices have larger geographical reach than banks.
According to an International Fund for Agricultural Development (IFAD) report, expanding the number of institutions offering remittance transfer services could more than double payment points in Africa. Saving and credit cooperatives and rural banks, would also be used as payment points for remittances.
Creating enabling regulatory and investment environments
Reforming the regulatory framework is an overriding step to leverage the impact of remittances on social transformation. We must work on measures aimed to ensure that remittance flows go into the formal financial system. This include work on setting up a regulatory framework aimed at improving flow of information, strengthening competition and reducing transfer costs in order to encourage migrants to use formal channels of money transfer.
Improving the business climate in Zimbabwe is another means to attract remittance flows from the Diaspora. A business-friendly environment may induce our migrants to send more money to their home countries and invest in productive domestic projects.
A possible avenue for investing remittances would be the Diaspora bonds, which some African governments have successfully used. According to estimates, Sub-Saharan African countries can raise between US$5 billion and US$10 billion per annum through the issuance of Diaspora bonds.
In 2011, Ethiopia is using Diaspora bond aimed at funding the construction of the Grand Renaissance Dam, which is expected to be Africa’s largest hydroelectric power plant.
Adopting new technologies of money transfer
An estimated 30 to 40 percent of remittances to Africa are sent to rural areas where banking facilities are generally non-existent. This is also the case for Zimbabwe. As a result, people travel long distances to receive their money. This cost of travel represents an additional burden to the already high cost of transfer.
Collectively, we should work on expanding payment networks to small-scale merchants and encouraging the adoption of new technologies such as payments through the Internet or mobile phones (as in Zimbabwe case – through Ecocash) can widen the reach of remittances and enhance financial inclusion to the people that need it most.
In addition to these measures, Zimbabwe can also consider revisiting the Homelink project and identification of specific investment projects for Zimbabwe in diaspora.
With respect to Homelink housing projects, there is need to revisit the pricing structures of various housing models as it is still on the high side. One need to consider the critical mass concept. We are not targeting few people from abroad but millions!
Homelink provide a safe investment for the diasporas but the cost is forcing our beloved nationals abroad to use relatives who in turn fleece them their hard earned cash.
Within the realm of the special economic zones and indigenisation, Zimbabwe must come up with a comprehensive offer which cut across all sector of the economy to the people in the diaspora. Whenever I hear about investment missions, I have not heard serious missions aimed at targeting our own nationals except during the era of Dr Gideon Gono.
In conclusion, our efforts aimed at addressing liquidity crunch should be centred on attracting FDIs, boosting exports of value added goods, fostering diaspora remittances and aid.
Together we make Zimbabwe great!
◆ Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness. He is a Research Associate of Nelson Mandela Metropolitan University. Feedback: +263 772 541 209 or [email protected]
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