A cyclical or structural surplus?

By Tafara Mtutu

FINANCE and Economic Development Minister Mthuli Ncube alluded to a current account surplus of US $ 684 million in the third quarter of 2021, down 0.6 percent from the previous quarter, in the recent speech on the budget for 2022. Strong global commodity prices were noted as one of the main drivers of the surplus.

The current account is a good summary of an economy’s trade with the rest of the world and is considered an indicator of the health of an economy.

The current account balance is largely influenced by (i) imports and exports of goods and services, (ii) net income earned abroad, and (iii) current transfers, such as remittances and donations. .

These factors hardly offset each other and the difference translates into a current account deficit or surplus. A current account surplus occurs when exports, current transfers, and net income earned abroad exceed imports and income out of the country, while a deficit occurs when the reverse occurs.

When a country exports more than it imports, it usually results in a trade surplus, vice versa, and this is one of the main drivers of a current account surplus.

Several factors that affect an economy’s trade balance include labor, capital, trade policies, interest rates, inflation, and exchange rates, but these factors are also influenced by the level of trade between countries. savings through economic feedback loops.

Unskilled labor is often associated with cheap labor which stimulates the business competitiveness of an exporting economy. This can increase the demand for goods produced in a low-cost country and subsequently boost employment figures. Newer and more efficient equipment also complements business competitiveness, and companies regularly purchase new equipment or maintain existing infrastructure to maintain their advantage in global trade.

Trade policies such as production subsidies in major export industries stimulate exports, while restrictions such as import quotas increase the costs of importing goods and generate a trade surplus.

Interest, inflation and exchange rates are monetary variables that should theoretically not affect trade and the current account. The economic theory of interest rate parity states that changes in interest rates are offset by an opposite and equivalent change in exchange rates to achieve an equilibrium without arbitrage, while the power parity theory d The purchase assumes that changes in the price levels of the same product in different countries are fully offset by changes in exchange rates.

Theories suggest that these factors should not play a large role in the current account balance as they offset themselves on their own, but empirical evidence has shown that this is not always the case.

The impact of a change in interest rates often takes longer than changes in exchange rates, opening up pockets of imbalance, which sometimes spill over into the current account balance.

Zimbabwe has a current account balance which is mainly in deficit with few occurrences of surplus. A granular analysis of the current account reveals several themes, among many others, that underline the economic health of the country.

First, the trade balance is the main driver of the current account balance, as is the norm in other economies. Merchandise imports account for around 57% of total monthly cross-border payments, and the growth in this figure since the start of 2019 coincides with the development of the interbank foreign exchange auction system which has improved access to foreign exchange through formal channels. in June 2020.

A large part of the transactions facilitated by the interbank auction system (about 47% of the total weekly allocations) was directed towards the purchase of raw materials, and 28% were used to finance capital expenditure.

In comparison, capital expenditure accounts for the largest part of the import bill of comparable goods from South Africa. This implies that, compared to South Africa, Zimbabwe spends more foreign exchange on the import of raw materials and relatively less on capital investments which could improve the chances of import substitution such as the “Buy” campaign. Zimbabwe ”.

On the other side, there are the country’s monthly cross-border revenues, which are largely driven by revenues from the mining sector. A sectoral analysis of export earnings highlights Zimbabwe’s gross dependence on mineral exports, which account for around 68% of total monthly export earnings.

This high concentration of export earnings in the mining sector imposes high volatility on the country’s current account. Soaring commodity prices due to factors such as the flight to safety and the resumption of global industrial activity amidst commodity shortages have pushed commodity prices higher throughout 2021, making it more difficult for commodities to rise. which also contributed to the positive current account in Zimbabwe.

We also welcome accommodative policies in the sector which have seen production of some commodities improve in 2021. The downside, however, depends on the possible weakening in commodity prices, which will likely reverse the hailed trade surplus. in the recent national budget report.

Looking ahead, we note the looming pressures on the current account deficit stemming from (i) the increase in imports driven by production in the agricultural sector in 2021 and 2022, and (ii) the weakening of commodity prices in the interval.

These pressures are also likely to spread to the depreciation of the local currency and, in turn, to inflation through economic feedback in 2022.

We are aware of the disparity in interest rates and exchange rates, but believe that the pass-through effects will be largely limited by the strong restrictions on capital mobility in the country.

On a lighter note, we are optimistic that the equipment purchase tax exemption will increase Zimbabwe’s gross fixed capital formation in the medium to long term and have a positive impact on the current account. Overall, this indicates that Zimbabwe’s current account surplus is more cyclical than structural.

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