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Forex Reserves, 2023 current account surplus will not help

ByEconomic Times

Jan 6, 2023

By ETimes

Zimbabwe is forecasted to have a current account surplus in 2023, but rating agency Fitch Ratings feels the surplus will not be able to help our foreign currency reserves position.

In a report, Fitch said, “The relatively small current account surplus that we are forecasting in 2023 will do little to support Zimbabwe’s precarious foreign-exchange (FX) reserve position.”

It is anticipated that Zimbabwe’s current account surplus will narrow from 3.0% of GDP in 2022 to 2.2% of GDP in 2023.

This will be driven by a combination of strong import demand in the run-up to elections in mid-2023 and weak global prices for Zimbabwe’s key commodity exports.

A current account surplus of this magnitude will do little to improve Zimbabwe’s precarious FX reserve position, leaving the currency vulnerable to further sharp falls.

Based on IMF data, FX reserves stood at US$0.8bn in May 2022 – the equivalent of just one month of import cover. The upshot is that, if the Zimbabwean dollar comes under renewed pressure, the authorities will have little ammunition to prop up the currency.

According to Fitch, this is a particular vulnerability given the risk of election-related violence later on in 2023, which has the potential to trigger a surge in capital outflows.

A drop in global prices for nickel, one of Zimbabwe’s key export commodities, will weigh on external trade.

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Based on Fitch projections, after rising by 31.3% in 2022, the world price of nickel is set to drop by 7.2% in 2023, and this will drag on the value of the country’s exports. At the same time, they do not anticipate any increase in gold prices in 2023, marking two straight years of stagnant prices.

Taken together, these metals accounted for 47.4% of Zimbabwe’s total goods exports in 2021 and accordingly, our export sector will be dealt a heavy blow.

The weak prospects for global demand will also weigh on our exports as it is expected that global real GDP growth will slow from 3.1% in 2022 to 2.0% in 2023.

Fitch said, “More specifically, we are forecasting GDP growth of just 1.6% in South Africa – Zimbabwe’s key trading partner and the destination for 48.4% of the country’s goods exports. Overall, we see Zimbabwe’s goods trade deficit widening from 0.7% of GDP in 2022 to 1.1% in 2023.” – Harare

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