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Zimbabwe’s perennial trade deficit is only but a symptom of deeper economic problems. There has been serious debate among economic stakeholders regarding the state of the country’s balance of trade, with press discussions on this issue almost always taking it as a given that surpluses are good and deficits are bad.

This is a mistake, as international trade theory has almost nothing to say about whether current account (or trade) deficits are good or bad, as not all trade deficits are bad, and even those that are; generally reflect some deeper problem in the economy, as is the case in Zimbabwe (Sumner, 2011).

A country that runs a current account deficit is borrowing money from the rest of the world and like any loan; the country has to pay back the principal amount at some future point with interest.

Therefore, the principle here is that, as long as the benefits from the investment of the borrowed funds exceed the costs, there is no reason to be concerned about running a deficit because the profits from the investments funded by the loan will be more than sufficient to pay back the interest and principle of the loans (Thoma, 2011).

Fast growing economies such as Korea ran trade deficits during the 1970s and 1980s, as the country during that era of rapid expansion, borrowed against its future prospects to fund its growth.

Recent statistics from the IMF suggest that over the last decade Korea ran a current account surplus averaging 3 percent of GDP, whilst simultaneously growing by an average real GDP growth rate of 4,8 percent during the same period.

In Sub-Sahara Africa, countries such as Ghana, Kenya, and Mozambique, to name a few, have for the last decade incurred perennial trade deficits, but have during that same period been growing by an average real GDP growth rate of above 5percent (IMF, 2014).

Perennial trade deficits are therefore not a problem when they are the result of temporary imbalances between investment and savings, as is the case with most of the fast growing Sub-Sahara Africa (SSA) nations, who need to invest a lot in physical capital such as roads, buildings, power and water infrastructure, to name a few.

At the same time these fast growing SSA countries, must also ensure that domestic consumption remains robust, therefore instead of cutting consumption to fund capital expenditure, they in turn borrow from abroad which means running a trade deficit. Later, when these countries have grown richer as is the case with Korea, they will reimburse debt by saving more than they invest, that is, through running trade surpluses (Saint-Paul, 2011).

However, although temporary current account deficits may be beneficial in certain circumstances, when economic shocks occur as was the case in the 2008 global financial crisis, governments often find it difficult to adjust their current accounts quickly enough to limit the damage  from such shocks, which is why most governments tend to avoid large and persistent current account deficits.

Furthermore, perennial current account deficits may also be a symptom of deeper structural weaknesses in an economy such as, high consumptive expenditure and low national savings, loss of manufacturing and export competitiveness, poor government economic policies, to name a few.

When a government has not been careful to invest the money it borrowed wisely, and the loans are used to fund extravagant spending by the powerful within the country and does nothing to raise productive capacity, then it will be difficult for the country to repay the money it has borrowed (Thoma, 2011).

In addition, the borrowed funds may also be used to fund unviable or overly inflated infrastructure projects, which will also not be able to payback the debt because the income generated is unable to meet the loan repayments.

Before the recent global financial crisis Iceland and Latvia ran extremely large current account deficits relative to GDP, with both countries during this period maintaining trade deficits averaging above 20 percent of GDP, against a European average of a surplus of 0,1 percent of GDP.

The two countries’ structural weaknesses were in their overreliance on foreign debt to fund their consumptive expenditure, therefore when the global crisis cut-off their supply of funding they both faced serious distress.

The Latvia crisis occurred when their credit market burst, resulting in an unemployment crisis, along with the bankruptcy of many companies. In February 2009 the Latvian government asked the IMF and the European Union for an emergency bailout loan of €7.5 billion ($10 billion), which it successfully implemented within 3 years, resulting in the country returning to a positive real GDP growth of 5.3 percent in 2011 from as low as negative 17.7 percent in 2009.

The Icelandic crisis on the other hand, occurred when all of Iceland’s major privately owned commercial banks collapsed during the global financial crisis as they failed to refinance their short-term debt after a run on deposits in the Netherlands and the United Kingdom. The three banks held 80 percent of the country’s external debt of 9.553 trillion Icelandic krónur (€50 billion), therefore when they collapsed, so did the economy.

Most of the Eurozone countries that went into distress as a result of the global financial crisis, such as Spain, Portugal, and Greece, all had a track record of persistent trade deficits, in the run up to the crisis, implying to a certain extent that the current account deficits made them vulnerable to distress in the event of an economic shock.

Following the adoption of the US Dollar anchored multi-currency regime, the country’s trade deficit initially improved from $9,1billion in 2008 to $4 billion in 2009, before reaching a post-dollarisation low of negative $2.6 billion in 2010.

However, since 2010 the country’s trade deficit has increased to $5 bilion in 2011, $3.6 billion in 2012 and most recently $4.2 billion as at 2013.

According to ZimStat, from 2008 to 2013, Zimbabwe has imported goods worth $38 billion (327 percent of GDP) while at the same time exporting goods worth $17.7 billion (152 percent of GDP) translating to a cumulative merchandise trade deficit of $20,3 billion (-175 percent of GDP).

The top five imports into the country over the last five years categorised using Standard International Trade Classification (SITC) are namely; chemicals (26,3 percent of imports); machinery and transport equipment (26 percent of imports); mineral fuels lubricants and related materials (14.4 percent of imports); food and live animals (11.8 percent of imports); and finally manufactured goods classified chiefly by material (9.2 percent of imports).

The top five exports from the country over the last five years categorised using SITC were namely; crude materials (41.6 percent of exports); beverages and tobacco (16.9 percent of exports); miscellaneous manufactured articles (12.5 percent of exports); commodities and transactions not classified by SITC (10.1 percent of exports); and manufactured goods by material (9.9 percent of exports).

An overview of the composition of the country’s imports reveals a diverse profile of goods and services that are imported into the country with chemicals being the country’s dominant import category.

Most of the chemicals imported into the country are raw materials for various manufacturing and industrial processes, pharmaceuticals, and also agrochemicals such as fertilisers significantly contributing to this group of imports.

Machinery and transport is the second largest category which is dominated by spare part imports spanning across all industries, and then followed by passenger and goods vehicles which since 2009 have both been averaging $500 million and $400 million respectively per year.

The third dominant category of imports is the mineral fuels which are dominated by the importation of diesel and petrol.
Overall, the country’s import base remains very diverse and fragmented, making it very difficult for the authorities to find quick wins in curbing the growth of imports.

Recently the Minister of Finance stated his reservation about the uncontrolled importation of second hand vehicles which as at 2013 were to the tune of $606 million or 7.9 percent of total imports for the year.

Passenger motor vehicle imports ranked third after diesel and fertiliser imports for 2013, a clear indication of the obsession that Zimbabweans have with the importation of motor vehicles, and this is also why we have argued that the weight of transport costs in the country’s CPI basket should be increased from current 9.8 percentage points to at least around 15 percentage points because of the importance of transport, being a land locked country.

Furthermore in our opinion, the reason why most Zimbabweans are buying cars is because there is no other viable savings alternative such as mortgages to channel their excess funds.

If mortgages were easier to access for example if the deposit on a mortgage was reduced from 25 percent to 10 percent of the value of the property as is the case in most Advanced Economies, this would mean if a civil servant raised $5,000 they would be able to buy a property worth $50,000 over a 10 to 20 year mortgage.

This means the opportunity cost of buying a second hand vehicle would be to own a house, which is every Zimbabwean’s number one priority and also has numerous downstream benefits for the overall economy as well.

What is also clear from the country’s import statistics is the fact that most of the imports into the country are not for productive but for consumptive purposes, meaning that when the time comes to payback the loans that funded the purchase of these imports, the country will be unable to meet its obligation.

The government should lead by example through its own National Budget as well as through the formulation of policies that encourage the importation of productive capital equipment that can generate income that allows the country to pay off its debt.

Closely linked to this issue is that of the current appalling state of national savings which are an important source of productive capital for the economy.

Because the country has no savings at this juncture, it has therefore become heavily reliant on foreign borrowings to finance its investment and consumptive activities.

What is of concern in Zimbabwe however is the fact that most of the borrowed funds are being channeled towards consumptive expenditure both in the public and private sectors of the economy, which is why non-performing loans are extremely high.
The country witnessed a surge in private sector credit since the inception of the multicurrency regime, which was mainly funded by external bank lines of credit.

Since most of the funds during this period of rapid credit expansion were channeled at household level towards non-productive assets such as motor vehicles, food, and clothing and at corporate level towards, unviable projects, poorly executed recapitalisations, non-productive company assets, resulting in a large portion of the funds being unrecoverable. Government on the other hand, has for decades been failing to implement important capital projects in the power, water, and road infrastructure, to name a few, which would have increased their revenue generation capacity and have to enable them to payback their dues to multilateral financiers such as the IMF.

Furthermore, the negligible budgetary allocations towards capital expenditure since dollarisation just show the lack of seriousness regarding this issue in government.

Now that lines of credit are drying up from abroad because of our inability to pay back loans, the government is now looking to raid the crumbs of domestic savings left over from hyperinflation, through the issuance of prescribed assets of various shapes and sizes to fund their recurrent expenditure.

Therefore, just like the lines of credit that the country has reneged on, there is no way that government is going to payback borrowed funds spent on recurrent expenditure, implying that at some point in time, pension funds and institutional investors would have to impair their assets to the value of their exposure to such assets.

The growing informal sector which is a function of the massive levels of unemployment as a result of company closures and perennial retrenchment exercises within the country, has also played a key role with regards to imports coming into the country.

Most of the unemployed and retrenchees make a living from buying and selling goods and products from abroad, further complicating the issue of controlling the rampant importation of goods, as livelihoods of  the majority of Zimbabweans in the informal sector will become at stake.

An overview of the country’s exports reveals just how fragile the Zimbabwean economy has become with the country’s dominant exports being crude materials in the form of mainly mineral resources at various stages of processing.

The second dominant category is that of mainly agricultural products where tobacco dominates, but cotton since 2009 has not been too far behind, averaging $200 million in exports per annum.

Manufactured exports are now only 9,9 percent of the country’s exports and with the declining capacity utilisation within the sector, it is clear that exports from this sector in 2014 are destined to be much lower.

To save this crucial economic sector, the government needs to relook at its indigenisation policy so as to come up with a win-win policy that is able to attract foreign direct investments (FDI) into this sector.

There are no two ways about it, as it is clear that the bulk of the country’s industries have lost their competitive edge over the last decade, and new efficient technology and expertise is required to get the sector back on track.

Simply stating at various ceremonies and conferences that foreigners are welcome, without going a step further to put in place robust measures to attract, protect, and retain foreign investors, will yield no results, as Zimbabwe is competing against several regional powerhouses for the same investors and we are currently sitting at number last in this race.

Agriculture which used to be the backbone of the Zimbabwean economy has over the last decade significantly underperformed because the land tenure system does not provide bankable title deeds to farmers so that they can access credit from financial institutions.

The time has come for the country to move on with regards to the land reform, and this entails giving the existing new farmers bankable title deeds.

Agriculture should be financed primarily by the private sector, therefore if farmers are unable to access adequate funding on time, this means that the sector will continue to underperform going forward and this is not acceptable for a country that has vast rich tracts of arable land and the best climate within the region.

Although the mining sector currently dominates exports, there is a general consensus within the country that this sector should be contributing more with regards to exports.

A key issue to address in this regard is the widespread smuggling of precious mineral out of the country which is really a government security issue.

However, credit must be given to the new government for finally raising the issue of mineral beneficiation through Zim-Asset, as it is clear that the country cannot sustainably grow its exports through the export of raw or semi-processed minerals.

Where we differ with government however, is to do with the timelines for the setting up of such plants, as we believe that beneficiation is more of a process than an event.

Therefore realistic timelines should be set by government to allow companies to raise the capital to set up refineries and other infrastructure to beneficiate their produce.

Furthermore, companies that are willing to add value to this economy through beneficiation should be exempted from the indigenisation laws up until they recoup their sunk costs in such projects, which is only fair.

No foreign investor is going to put a cent to build a multi-billion dollar refinery that they will have to impair 51 percent when they have completed it, we are not that special.

Another good policy put forward in Zim-Asset, is the setting up of special economic zones (SEZ).
Most of the Asian powerhouses owe their high growth rates to SEZs, therefore such vehicles can be a very important means of luring FDI into the country, over a very short space of time.

However like many good policy proposals before, the issue of implementation remains the biggest stumbling block for our government.
Overall, it is clear according to our research that the country’s current account deficit is rather a symptom of deep seeded problems within the Zimbabwean economy.

But most of these problems that the country faces can be resolved if the country implements the right business and investor friendly policies.

The most important policy that must be reviewed at this juncture is the indigenisation policy, as it needs to be refined into a consistent, sector and broad based policy that provides win-win opportunities for both foreign and local investors.

The biggest and best form of empowerment in any country is the ability for its citizens to find gainful employment, and therefore FDI plays a key role in the creation of employment in an economy.

The government should through its policy framework discourage consumptive expenditure whilst at the same time encourage capital expenditure and savings which enable a country generate income to payback its obligations to local and foreign lenders of capital.
An important vehicle in this regard is the promotion of savings vehicles such as mortgages that ensure                    that households have long-term savings and are left with less disposable income for consumptive expenditure.

The government should also look at reducing its recurrent expenditure, and with the declining tax revenue base, it is clear and understandable that government will at some point have to consider retrenching a large portion of its civil service in order to strengthen itself and unlock funds to repay its debts and to fund capital expenditure.

The government should also relook at the current land tenure system in the farms with a view to  providing title deeds to the new farmers so that they can do their job, which is to grow food for the country and generate export revenue. There is no compromise on this issue.

Finally government must re-engage the international community and prove itself as a disciplined and fair economic player within the global community. In this regard government must remain committed to the IMF Staff Monitored Programme, which will prove our commitment to financial discipline and also unlock the financial assistance that the country desperately needs.

We remain encouraged by the recent progressive statements that the Minister of Finance has been making, and also the promising and positive initial press statement by the new Reserve Bank of Zimbabwe Governor.

Overall we remain optimistic that with the right policy mix, the country will through hard work turnaround, but what cannot be ascertained is the timing of the turnaround.

This article was written by Zimnat Asset Management for FinX