Will a currency clearing deal with China help Zimbabwe?
ECOBANK Zimbabwe, a member of Africa’s largest bank by geographical reach, wrote: “Do you want to make or receive payments to and from China using RMB or Chinese Yuan? Enquire in our branch or contact your account manager for information.”
Quite interesting and another “currency debate” as we enter 2023. “Will a currency clearing deal with China help Zimbabwe?”.
The current year is on the cusp of ending, but the Covid-19 pandemic, alongside the war in Ukraine, are still ongoing, with the world continuing to suffer from global supply shocks.
That being said, an overboard monetary tightening policy stance adopted by many central banks around the world as well as the International Monetary Fund (IMF), recommending a strong pro-cyclical policy response, including squeezing aggregate demand through monetary tightening, to both programme countries and generally, means that strong recessionary headwinds are building up for the global economy.
That being said, while the calls for a new IMF special drawing rights (SDRs) allocation– on the same lines as in August 2021, to the tune of US$650 billion – have been raised quite loudly around the middle of the current year, there is still no indication of this by the IMF.
With many developing countries facing serious balance of payments headaches and debt distress, and given a stronger dollar at the back of overboard monetary tightening and, in turn, significant capital flight from developing countries, resulting in greater imported inflation on the back of weakening domestic currencies of a number of these countries, a quick release of enhanced SDR allocation makes immense sense. Where such allocation is made with a more appropriate needs-based allocation criterion followed by IMF, unlike the August 2021 episode whereby most of enhanced SDR allocation went to rich countries.
It is strange then that while developing countries in particular are in the jaws of so many economic crises ranging from weak balance of payments, to difficult debt repayments situation, to currently low growth situation in many developing countries, and even as recession looms large around the corner, and little debt moratorium/relief, climate finance, and SDR allocation coming to the rescue– the IMF still continues with its rather notorious policy of surcharges, as fees on late payments on its loans by programme countries. This policy needs to immediately stop, especially given a situation of multiple economic crises facing the world, especially us in the global South.
Zimbabwe, given these global challenges, is also facing internal problems, both monetary and fiscal. Some are more structural in nature and require policy reforms. Of interest is the ongoing currency debate. Recently, the IMF advised that authorities should take a more hawkish policy stance and do away with gold coins. This implies further constraining of domestic demand in the face of a looming global economic recession as a result of overboard monetary tightening.
While in the midst of this, Ecobank wrote, “Do you want to make or receive payments to and from China using RMB or Chinese Yuan?” It reminded me that Zimbabwe and China have a currency swap deal, but do they have a currency clearing deal? A clearing system, also described as a clearing house, serves as the intermediary between two parties and is also the agency through which financial instruments such as stocks, bonds and currencies are often exchanged. However, one lingering question remains: can such an unprecedented step address Zimbabwe’s economic woes?
Arguably, fluctuations in currency distort local business confidence and exacerbate the balance of payments crisis, particularly via trade deficits. The Zimbabwe dollar has never been stable since rebirth, and it will continue to lose value as a result of the probable negative spillover impact of an increase in interest rates and tighter monetary policy in the US.
On the other hand, the Yuan’s benefit as a pricing tool stems from its stability, expanding significance in international settlements and payments, and support from China’s economic strength. For instance, since the worldwide Covid-19 outbreak, the Chinese yuan has depreciated less than other major currencies versus the US dollar. The Japanese yen has dropped 48% from its high since the outbreak, while the euro has been down 22%, following a 27% drop in the British pound, and the South African rand has dropped 53%. The yuan fell 16%.
However, opting for the yuan clearing deal is not the panacea for all economic woes. The prime issue is the alarming trade deficit with China. It is estimated that in 2022, the overall trade volume between the two nations reached close US$2 billion, with Pakistan exporting less than US$600 million and importing more than US$1.4 billion from China.
Overall, Zimbabwe has been registering a trade surplus, though it has deficits with China. In the short term, the currency clearing agreement will assist Zimbabwe by reducing pressure on the Zimbabwean dollar against the US dollar. However, unless Zimbabwe’s trade balance with China improves, the country may face another balance of payments crisis, even if payments are made in Chinese currency.
Zimbabwe must strive for corrective measures to balance its unbalanced structure, as well as fundamental policy adjustments. First, Zimbabwe must enhance its productive capacity and value addition in goods. Beneficiation of mineral resources is key as most of them are exported raw to China.
Agricultural productivity is relatively poor in comparison to regional competitors. Human capital investment is critical for increasing labour productivity. Zimbabwe must aim to strengthen its knowledge capital, which will be a significant driver of future productivity, diversity, greater innovation, hence higher growth.
Second, it is imperative to have person-to-person or business-to-business contact, which connects our small and medium-sized businesses to the global value chain. This will modernise and upgrade our industrial structure while also generating much-needed revenue. Vietnam, for example, is linked with Samsung in the manufacture of mobile components and earns a sizable US$72 billion annually. In Zimbabwe, the bulk of manufacturing industries is inward looking, that is, meeting the demand of domestic users.
Finally, at the present, the majority of trade between Zimbabwe and China is conducted in US dollars. The Chinese yuan is more stable than the US dollar since it is not a worldwide currency. Against this setting, yuan-based payment systems have the potential to significantly boost Zimbabwe’s export competitiveness.
A slight increase in interest rates by the Federal Reserve raises the value of the US dollar, rendering Zimbabwean items uncompetitive.
Because the yuan is less sensitive to worldwide volatility, Zimbabwean goods may be more competitive for export to China and find larger market share in the Chinese as well as other Asian markets. This is because the potential for trading in yuan is expanding as its reserves in global central banks grow.
Please let me know your thoughts. Happy holidays!
*About the writer: Tinashe Kaduwo is a researcher and economist. Contact: [email protected]. WhatsApp +263773376128