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Dollarisation wipes out domestic savings

ZIMBABWE’S domestic savings have been wiped out by hyperinflation and dollarisation, leaving the country relying on foreign capital which is not an optimal growth path, a leading economist has said.

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Tony Hawkins, a professor of business at the University of Zimbabwe’s Graduate School of Management, said last week that excessive “dependence on foreign capital is deeply ironic given the government’s indigenisation policy”.

“Those countries that reduce consumption — as a percentage of GDP [Gross Domestic Product] — and boost domestic savings, use their capital better to grow faster than those that rely on foreign borrowing, especially foreign aid,” Hawkins said at an HIS Africa Economic Outlook conference in South Africa.

Hawkins said foreigners were not going to supply the requisite capital “so long as economic and resource nationalism dominate the policy agenda and there is no debt-restructuring agreement”.

Since 2009, Zimbabwe has attracted US$6,7 billion in foreign capital with the majority (80%) borrowed offshore and the remainder in portfolio and Foreign Direct Investment (FDI).

Hawkins said FDI is more closely correlated with growth, but Zimbabwe’s current hostile stance towards FDI limits such inflows in reference to the indigenisation legislation which analysts say scare away potential investors.

The law stipulates that at least 51% shareholding in any businesses with a net asset value of US$500 000 or more should be in the hands of locals.

Foreign debt to double in five years

Tony Hawkins said by the end of the year, foreign debt — including arrears — would have almost doubled in just five years.

“Most of this steep increase in offshore borrowing is short-term funding by the private sector while long-term inflows, including FDI, have been disappointing,” he said.

‘Zimbabwe’s economy undermines export competitiveness’

Tony Hawkins said the trade gap, although narrowing to US$2,7 billion last year from US$3,1 billion in 2011, remains huge as the country is a serial over-consumer (90% of GDP) so that demand spills over into imports.

He said the country has become “a high-cost, low-productivity economy that attracts imports and undermines export competitiveness”.

Since 2009, Zimbabwe has run up a cumulative balance-of-payments deficit of about US$11,6 billion.

Over half has been covered by net capital inflows, a quarter in unrecorded inflows and the balance further built-up in arrears, now totalling about US$7,5 billion, Hawkins said.

He said seven primary products, dominated by precious and semi-precious metals, contributed two-thirds of exports.

Four products — tobacco, platinum, diamonds and gold — contribute almost 60% of the exports.

“This highlights just how vulnerable the economy is to commodity price fluctuations, especially those for gold, platinum and diamonds, where Zimbabwe is a volume producer of low-quality gems,” Hawkins said.

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