Continued US dollar use fuelling trade deficit

ANALYSTS say the accelerated re-dollarisation drive being witnessed is fuelling Zimbabwe’s trade deficit, as United States Dollar continues to dominate as a legal tender in the local economy.

According to Zimbabwe National Statistics Agency (ZimStats), the country’s imports exceeded exports by US$561, 21 million in the first quarter of 2023.

The figure is US$121, 65 million ahead of the US$439, 56 million deficit recorded for the same period in 2022 pointing to a widening gap.

The dominant use of the USD as a medium of exchange is known to choke industry performance, particularly in emerging economies like Zimbabwe as imports become cheap for locals, while exports from Zimbabwe become exorbitant and less competitive on the global market.

Recent ZimStats trade data survey established that about 78 percent of domestic transactions were conducted in USDs in 2022 up from 2021 levels.

As the trade deficit widened in the first quarter of 2023, some sections have attributed the development to a dollarising economy amongst other influencing factors.

Dollarisation occurs when a country adopts the use of the US dollar as part of its official currencies and in the case of Zimbabwe, the country adopted the use of the US dollar in 2009, after years of hyperinflation and the collapse of the local currency.

Dollarisation can have both positive and negative effects on a country’s economy as it can provide stability and confidence in the currency, which can encourage foreign investment and trade.

However, it can also limit a country’s ability to control its monetary policy and respond to economic shocks.

Zimbabwe’s top imports in March 2023 were dominated by mineral fuels and fuel products at 22, 7 percent, machinery, and mechanical appliances (12, 2 percent), iron and steel (7,9 percent), vehicles (7.2 percent), and cereals at 5, 7 percent.

On the other hand main exports for the month were semi-manufactured gold at 27, 3 percent, nickel ores and concentrates (22, 7 percent), nickel mattes (13, 9 percent), tobacco (7, 9 percent), ferrochromium (7, 5 percent) and unwrought platinum at 4,7 percent.

Statistics also show that merchandise imports took a 19, 8 percent climb in March 2023 to US$744, 5 million from US$621, 4 million recorded in the prior month.

On the flip side, Zimbabwe’s merchandise exports grew by 18, 2 percent to US$515.3 million in March 2023 from US$435, 9 million achieved in February 2023.

Firm USD reduces the cost of imports and lowers domestic production. It raises export prices while imported products will be favoured at the expense of local products, which could further widen the trade deficit.

Zimbabwe Coalition on Debt and Development (ZIMCODD), a local think tank is of the view that dollarisation stifles local industry performance thus need for swift de-dolarisation interventions by the responsible authorities.

“Generally, the use of strong USD as legal tender by small economies like Zimbabwe suffocates local industry as imports become relatively cheaper for locals while making exports relatively expensive for foreigners.”

“If no bold de-dollarisation policies are undertaken, the trade deficit will continue to balloon just as was the case during full dollarisation (2009-2018) when it averaged US$2, 5 billion per year,” said ZIMCODD in its periodic review.

For the last two years, Zimbabwe’s trade deficit has averaged US$1, 78 billion with US$1, 54 billion and US$2, 02 billion having been recorded in 2021 and 2022 respectively.

The growing sentiment by industrialists is that the local economy strongly requires the local currency to anchor the significant amount of economic activity going on, hence they are not willing for the economy to get back to a fully dollarised environment.

Zimbabwe’s own currency was reintroduced on the local market in February 2019 and has been working alongside other currencies significantly the South African Rand and the United States dollar.

The Confederation of Zimbabwe Industries ( CZI) recently implored relevant authorities to explore possible panaceas to prevent the impending collapse of the Zimbabwe dollar.

According to the business member organisation the local currency has lost its function as a store of value and some retailers no longer want to hold the inflation ravaged currency, given that the Zimbabwe dollar is now being rejected in some sections of the informal sector.

“Zimbabwe is about 76 percent dollarised, so as we deepen in dollarisation, our exports are not going to be competitive, said CZI President Kurai Matsheza recently.

South Africa however remains Zimbabwe’s main trading partner accounting for 46, 2 percent of the country’s exports and 37, 6 percent imports.