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Zimbabwe: U.S. Dollar Stocks Continue to Decline

A NEW report has raised fears that the United States dollar could be completely wiped out of the Zimbabwean market, with disastrous consequences on the fragile economy.

The report, authored by researchers at advisory firm, MMC Capital and dispatched to clients last week, warned of potential deterioration of current foreign payment problems and warned that companies faced the risk of failing to import raw materials.

It said since the introduction of bond notes by the central bank in November, circulation of US dollars had declined, with the view that the public was withholding of substantial amounts of the greenback and only transacting using bond notes.

The amount of US dollars in circulation has been dwindling, MMC said.

“Our fear is that if this trend continues, US dollars will completely disappear from the market, resulting in the majority of companies failing to import raw materials, inflationary pressures and loss of value on monetary assets,” MMC said in the report titled 2017: Zimbabwe Equities Outlook & Stock Picks.

“We have started to witness the manifestation of the Gresham’s Law on the local market. Gresham’s Law states that any circulating currency consisting of both ‘good’ and ‘bad’ money quickly becomes dominated by the ‘bad’ money. Good money refers to the currency people perceive to have a higher value and bad money refers to the currency they perceive to be overvalued (bond notes). This is because people spending money will hand over the ‘bad’ money rather than the ‘good’ money,” the report added.

About $94 million in bond notes have been injected into the economy in the past three months under the guise of funding an export incentive but largely to ameliorate a cash crisis in the country.

This represents about half of the $200 million the central bank targets to bring into circulation.

Bond notes were set at par with the US dollar, but in the past month, a currency black market for US dollars has emerged as people chase for the greenback.

MMC slashed Zimbabwe’s 2017 growth forecasts by over half of the 1,7 percent announced by government in December last year, citing previously unforeseen pressures on agriculture, which could override ongoing reforms.

It projected Gross Domestic Product (GDP) to grow at 0,5 percent this year.

The tourism model being pursued by authorities has turned Zimbabwe into the most expensive destination in the region, and unless this is reviewed, it could also deal a blow on growth forecasts, according to MMC.

It said there were still no “tailwinds” to the economic meltdown, and projected that headwinds would continue to ravage the liquidity starved markets.

The crisis has been driven by years of malfunction in the key manufacturing sector, high costs of doing business that have discouraged investment, depressed exports and a liquidity crisis that has roiled the markets since 2013.

The Ministry of Finance and Economic Development had ambitiously forecast a GDP growth rate of 1,7 percent, after projecting growth in agriculture, mining and tourism industries.

“Our view is that the 2017 growth rate will come in at around 0,5 percent as there are no tailwinds in sight,” MMC said.

“Treasury anticipates a GDP growth rate of 1,7 percent in 2017, facilitated by the improved performances in the agriculture, mining and tourism sectors. Agricultural driven growth will be dependent upon the success of the command farming scheme as well as the La Nina effect which is expected to yield normal to above normal rainfalls. Our view is that, due to the severe floods and the failure by the government to provide inputs timeously, the targeted growth will not be achieved. The majority of farmers across Zimbabwe are under siege by the army worm, which could potentially reduce the targeted yields,” MMC said.

“Tourism, with an expected growth rate of 0,8 percent in 2017, remains one of the anchors of economic revival in Zimbabwe. The positive momentum will be supported by the expected growth in the number of tourists. This sector contributes approximately 14 percent to Gross Domestic Product. Our view is that there is need to continue revising the pricing model in Zimbabwe as leisure packages are relatively cheaper in neighbouring countries,” the report added.

Zimbabwe’s economy continued with its distress last year.

Despite several measures announced last year to reverse the meltdown including the introduction of bond notes, the liquidity crisis has persisted.

Two weeks ago, the central bank announced a series of measures to improve foreign currency inflows into the economy.

Source :

allafrica

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