Trade deficit destabilises economy

Trade deficit destabilises economy
Published: 08 June 2018
THE widening trade deficit which reached almost US$1 billion in the first four months of 2018 continues to wreak havoc on the deepening economic crisis despite government's repeated claim that the country is on the road to recovery.

Statistics released by the Reserve Bank of Zimbabwe (RBZ) last week show that the trade deficit for the first four months of 2018 stood at US$998,8 million, which is far higher than the same period last year when it stood at US$603,1 million .

This means that the deficit has widened by 65,61% compared to the same period last year. The data reveals that the country imported goods worth US$2,21 billion in the period under review against exports of US$1,21 billion. This is despite the rationing of foreign currency by the RBZ and import restrictions.

The central bank noted that the external sector position has remained considerably under pressure on account of deep-seated structural challenges of fiscal constraints, current account deficit, limited access to foreign finance, debt overhang, limited supply of ethanol for blending and, more recently, the jump in international fuel prices.

"These structural challenges, together with improved business confidence within the economy, have significantly contributed to the huge demand for imports of goods and services, resulting in high trade deficits in excess of US$1,5 billion annually. This trade gap, which exacerbates foreign exchange shortages within the economy, requires to be closed for balance of payments to balance," the RBZ said.

The trade deficit - a negative balance of trade caused by more imports than exports - has widened despite government's introduction of Statutory Instrument 64 in 2016 which remains in force. This prohibited the importation of 43 items in a desperate attempt to curb the trade deficit by promoting the local manufacturing sector.

The galloping deficit provides ample evidence that the medicine to cure the trade imbalance has not had the desired effect.

The grim statistics are a far cry from government's repeated mantra that the economy is on the mend since President Emmerson Mnangagwa was inaugurated in November last year.
The Mnangagwa administration,which has adopted the slogan "Zimbabwe is open for business", has been at pains to report progress, but the characteristics of the economic crisis prior to Mnangagwa's presidency persist.

Presenting the 2018 budget last year, Finance minister Patrick Chinamasa said that the country's fiscal deficit stood at US$672 billion. The current account deficit has continued to widen from an estimated US$552,8 million in 2016 to about US$617 million last year, which shows the impact of the widening trade imbalance on the economic crisis .

Economist Godfrey Kanyenze said the coming in of the new dispensation has failed to curb the deficit.

"We are even more dependent on imports and the coming in of the new dispensation has not solved the age old problem of diminished production across all sectors of the economy," Kanyenze said. "We are still highly reliant on imports in spite of the rationing of foreign currency. We still have a worsening deficit because we have not addressed the structural bottlenecks."

He added: "The problem cannot be addressed overnight and cannot be addressed by just opening up. Opening up is not a strategy in itself."

Even though a trade deficit may have its own advantages like giving consumers a choice and keeping inflation low by increasing competition, it has predictable negative consequences that affect economic growth and stability. A negative trade balance also affects local industry and thus employment levels.

Generally, the lower the trade deficit, the greater a country's competitive strength and the higher its economic growth.

Last month, the Confederation of Zimbabwe Industries (CZI) launched its composite Business Confidence Index (BCI) that showed that business confidence in Mnangagwa's administration has dipped.

CZI president Sifelani Jabangwe said the composite BCI for the first quarter of 2018 stood at minus 14,4 for quarter-on-quarter basis and 20,9 year-on-year.
"This indicates lack of confidence and pessimism of business leaders for quarter-on-quarter business condition, but optimism of business leaders regarding the year-on-year economic situation," he said.

"What motivated this pessimistic result was that most manufacturers have been failing to get foreign currency for their operations to a point where their production has been greatly affected. Almost every manufacturer we surveyed complained that they were receiving little or no foreign currency so I would say it has been mainly due to foreign currency shortages."

Zimbabwe National Chamber of Commerce (ZNCC) president Divine Ndhlukula said fore shortages have had a devastating impact on business.

"Business is failing to import raw materials because foreign payments are not being processed with some having been in the queue for over a year now. This has seen some cancelling orders due to these delays. Some local suppliers have even doubled prices to allow themselves to buy forex," she said.

Former ZNCC president and economist Oswell Binha said: "Government should allow the bond note to float if they cannot demonetise it," Binha said. "They should remove the responsibility of controlling foreign currency distribution from the central bank to commercial banks and regulate it through monetary instruments."

Economist Prosper Chitambara said the ever-widening trade imbalance is cause for concern.

"What was happened is that we still have appetite for imports being caused by the production capacity being very low," Chitambara said. "Exports have increased slightly, but imports have increased by an even wider margin. It is a very worrying trend."
- the independent
Tags: Deficit,


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