Why Zim should worry about trade deficits

22 Mar, 2019 - 00:03 0 Views
Why Zim should worry about trade deficits RBZ

eBusiness Weekly

Clive Mphambela
In March 2018, while announcing his new tariff plans which eventually led to a full scale trade war against China, American President, Donald Trump sullenly announced: “We lose $800 billion a year on trade, every year.”

Trump was referring to the size of the US economy’s trade deficit in goods, which he had also relentlessly lamented during his presidential campaign. Trump world view of trade deficits and hence his disdain for them, was summarised in one of his tweets which said that as a result; “our jobs and wealth are being given to other countries.”

Indeed for Zimbabwe, it has been a common view that our perpetual annual trade deficits would eventually come to haunt us.

In fact in 2013, I wrote in the media that Zimbabwe’s trade deficits were a disaster waiting to happen. This ominous prediction was not at the time, a scientific observation, but more of an intuitive hunch, rooted in observation that the country was spending a lot more on imports than it was earning in exports and other non-trade foreign currency flows.

It was my reasoned feeling that sooner rather than later, the country would “run out of money” and it surely did. As we turned into 2015, cash and foreign currency shortages began to appear, and they got progressively worse.

Well Zimbabwe’s provisional trade numbers for 2018 paint a grim picture about the pattern of trade.

Whilst total exports for 2018 came in at US$4,1 billion up 17 percent from US$3,5 billion earned in 2017, the import bill for 2018 was US$6,4 billion — a sharp 29 percent increase on the US$5billion incurred in 2017.

These figures show a net result of a 53 percent increase in the trade deficit between the two years from US$1,5 billion in 2017 to US$2,3 billion in 2018. Not a nice development at all.

But why are trade deficits so bad and why should policy makers continue to worry about them.

The short and quick answer is that our perennial trade deficits are a major causative factor for the country’s foreign currency shortages.

In theory, trade deficits by themselves are not inherently harmful, since it is assumed that the imported merchandise being goods, are exchanged in the country for value in the form of tradeable currency and thus contribute to GDP.

Economists also argue that some of the imports are also invariably comprised of capital goods, intermediate goods as well as capital goods that are used in subsequent value adding processes that ultimately aid in improving the productive capacity of the country.

Welfare economists argue that imports of competitively priced consumption goods improves welfare of local consumers by giving them wider choice of affordable goods and if imports are cheaper than local goods, this can potentially increase social welfare and keep inflation down. However, this is in theory.

For a fragile, under diversified, small economy such as ours, massive imports translate invariably into lost domestic production opportunities, low domestic capacity utilisation and lost jobs.

Furthermore, heavy reliance on imports also puts immense pressure on the current account and eventually impacts negatively the country’s ability to maintain stable exchange rates in the long-term and therefore end up translating into very high inflation.

With perennial trade deficits the availability of foreign currency (particularly the US dollar) has continued to dry up and this has impacted on importing companies that are now failing to pay for critical components and raw materials.

Many productive companies in Zimbabwe have no means to generate foreign currency revenue and without foreign currency, these companies have been forced to resort to waiting long periods for and by the Reserve Bank of Zimbabwe.

Alternatively importers have been forced to buy US dollars at highly inflated prices the black currency markets, which has increased both risks and costs and this has triggered and inflation spiral. Government is now fighting tooth and nail to reign in inflation and has implemented various policies.

It is refreshing to note that the early results of some of these policies are beginning to filter through in the form of reduced imports, increased exports and a narrowing of the trade deficit.

A trade deficit is an amount by which the cost of a country’s imports exceeds the cost of its exports. It’s one way of measuring international trade, and it’s also called a negative balance of trade. You can calculate a trade deficit by subtracting the total value of a country’s exports from the total value of its imports.

A trade deficit occurs when a country does not produce everything it needs and effectively either borrows from foreign entities to pay for its imports.

This usually translates into the current account deficit.

Trade deficit also occur when domestic companies manufacture their goods in foreign countries. Under this arrangement, raw materials are shipped at lower value for manufacturing at overseas factories and these are counted as exports. The finished manufactured goods are later accounted for as imports when they are shipped back to the country.

But what can we learn from Trumps remarks. For decades, the US has been running trade deficits in the trade of goods — in other words, the country has been importing more goods than it exports.

The dominant economic narrative is that the continuously increasing US “trade deficit” has been largely a function of two things; first, the wide availability of cheaper labour resources overseas and secondly, the unbridled import driven consumption habits of the Americans.

As a consequence of these two main factors, the narrative goes, the US has had to import increasing amounts of capital through investments by foreign governments, businesses, and individuals in its debt securities in order to “fund the trade deficit,” thus effectively transforming the US into becoming a “debtor nation”.

When put this way, this becomes very familiar to us.

Recently, our Reserve Bank Governor disclosed that the country has recently borrowed US$950 million from various African banks.

This money we know, has been channelled largely to imports of mainly consumptive goods. This state of affairs needs to be turned on its head, and sooner rather than later, we need as a country to stop and reconfigure our economy.

At this stage I would worry about trade deficits and seek to find ways to turn Zimbabwe into a net exporter.

The writer is an economist and the views expressed in this article are his personal opinion and should in no way present views of any organisations that the writer is associated with.

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