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Zimbabwe's currency swap deal

23 January 2020 Alisa Strobel
  • Zimbabwean Finance Minister Professor Mthuli Ncube confirmed on 13 January 2020 that a currency swap deal had been reached with China, in an interview with state media on the sidelines of a meeting between Zimbabwean President Emmerson Mnangagwa and Chinese Foreign Mminister Wang Yi at the State House in Harare. The new deal will make it easier for Chinese enterprises operating in Zimbabwe to move their funds out of the country.
  • Finance Minister Ncube stated to media that Zimbabwe has entered into the currency swap arrangement with "the idea that is those individuals [Chinese investors] will then swap [currency] so that those who are investing in Zimbabwe are able to give them a domestic currency - which they are bringing in for investment - to pay those who are exiting".
  • The currency swap deal is expected to simplify Zimbabwe's current exchange control system; however, IHS Markit sees limited scope for Zimbabwe to benefit from this swap arrangement given the nature of its unstable economy with a strongly depreciating currency. As Zimbabwe is facing a severe economic crisis with annual headline inflation hitting 521.2% in December 2019, the currency swap deal with China comes as an attempt to avoid using the US dollar, which is in short supply, to advance currency stability.

US-dollar shortages will persist in the one-year outlook despite the latest currency swap arrangement with China.

We see changes to Zimbabwe's current capital control system as likely in order for Zimbabwe to attract foreign investment. The Reserve Bank of Zimbabwe (RBZ), the central bank, established a foreign-exchange (FX) priority list to guide banks in the distribution of foreign currency at the preferential official exchange rate towards competing demands. According to latest available data from official sources, the RBZ limits the cash that clients can take out of the country to USD2,000. However, some industry segments such as tourism are now allowed to use FX for day-to-day transactions amid the lack of trust in the newly reintroduced Zimbabwean dollar (ZWL).

Policy uncertainty and a continuation of FX market distortions in tandem with an expansionary monetary stance increases pressure on the exchange rate. With increasing difficulty in obtaining external credit, FX bank-transfer delays could reach months due to the dysfunctional nature of the local financial system, as well as severe shortages of FX. The focus of the government in dealing with the current liquidity crisis is printing more cash officially. The government announced in November 2019 that it will print more cash to increase liquidity via the introduction of the ZWL2 coin and ZWL2 and ZWL5 notes.

The agricultural and mining sectors are the key sources of FX. Over the past few years, the informal sector via the black market and diaspora accounts has been driving FX sources. However, weak global nickel, diamond, and tobacco prices led to a disappointing export performance during the first two quarters of 2019, driving FX levels further down. Zimbabwe's trade deficit reached USD165.9 million during the first three months of 2019. Merchandise exports stood at USD277.0 million in April 2019, a decline of 6.4% from USD295.9 million in March and impacting on FX availability.

Net foreign currency inflows amounted to USD9.55 million in the second quarter of 2019, from a net inflow of USD22.42 million recorded in the first quarter of 2019. FX deposits maintained a growth trajectory in August 2019; however, they remain below the 2018 average, although increasing by 5.41% in August. SWIFT foreign currency payments decreased by 5% to USD0.69 billion during the second quarter of 2019, from USD0.72 billion in the first quarter. For the same periods, SWIFT foreign currency receipts decreased by 6% to USD0.69 billion, from USD0.74 billion.

Furthermore, the FX shortages are likely to increase non-payment risks and drive contract cancellation concerns, particularly in the mining, agriculture, and energy sectors. Contracts held by companies and persons with known familial or business connections to former cabinet ministers of the ruling ZANU-PF party, such as Obert Mpofu, face payment delays or outright cancellations pending the completion of an audit commissioned by Finance Minister Ncube, according to an IHS Markit source. The government is also likely to maintain the priority of organisations such as hospitals needing access to FX, while imposing short-term FX repatriation controls on portfolio investors on the Zimbabwe Stock Exchange. According to IHS Markit's country risk service, on 1 November 2019, wholly Zimbabwean-owned gold miner RioZim announced that it had closed three mines in Kadoma, Masvingo, and Chegutu due to FX shortages affecting the importing of spare parts and consumables. The company said it has been able to access only 14% of its gold delivery proceeds over the past 30 months.

The recent trend in the depreciation of the local currency's exchange rate was in part occasioned by an increase in reserve money and adverse inflation expectations. Furthermore, we see that currency's stability will depend on the successful implementation of the International Monetary Fund's staff-monitored programme (SMP), aimed at supporting the government's Transitional Stabilisation Programme to fix the country's macroeconomic imbalances. The SMP is aimed at pushing economic policies to address the country's fiscal deficit by implementing large fiscal adjustments, as well as the ending of the central bank's financing of the fiscal deficit, through the adoption of reforms that put emphasis on a functioning market-based foreign-exchange and debt market.

Posted 23 January 2020 by Alisa Strobel, Senior Economist

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