Remittances and economic growth in Zimbabwe

Remittances give countries the ability to fund development their own way; however, like a teenager flush with cash from a first job, developing countries first have to understand just what it takes to effectively use remittance funds. If it is to efficiently use these funds the country must first develop policies that promote smart, stable growth, and to ensure that growth is not solely concentrated in the cities.

Remittances and Developing Nations

Many developing countries have difficulty borrowing money, just as a first-time home buyer might have difficulty obtaining a mortgage (Mortgage in Zimbabwe). Developing nations – the sort that are most likely to rely on remittances – tend to have less stable governments and are less likely to repay the debt or not go into default. While organizations such as the World Bank can provide funding, these funds often come with strings attached. For governments in the developing world, this may simply be too much of a step on sovereignty, especially if power is being held by a thread.^[1]

Remittance Problems

While remittances are an important lifeline in many developing countries, they can also foster a dependency on outside flows of capital instead of prompting developing countries to create sustainable, local economies. The more a country depends on inflows of funds from remittances, the more that it will be dependent on the global economy staying healthy.

Remittance flows can be negatively impacted by a downturn in the global economy. Workers employed abroad may lose their job if they are in heavily-cyclical industries, such as construction, and may have to stop sending remittances. This has a two-pronged effect. First, the home country may see a significant portion of its income dry up, and thus not be able to fund projects or continue development. Second, workers who moved abroad may move back home, exacerbating the problem by increasing the demand for services on an already strapped economy.

Macroeconomic Effects

Large inflows in foreign currency can cause the domestic currency to appreciate, often referred to as Dutch Disease. This in turn makes the country's exports less price competitive, since goods become more expensive to other countries as the domestic currency rises. Because the domestic currency is valued higher, consumption of imports begins to rise. This can snuff out the domestic industries of developing countries. The inflow of cash, however, can also help the recipient country reduce its Balance of Payments (BoP).

Conversely, remittances may have negative effects on economic growth by reducing labor supply and participation. They increase the recipients’ wealth and can undermine their incentives to work, which, in turn, slows economic growth.

Remittances and Economic Growth in Zimbabwe

The revelation by World Remit in February 2020 that Zimbabwe was one of the top five beneficiaries of international remittances in Africa for 2019 underlines the potential that the country has to strategically channel diaspora remittances into large-scale investments in critical sectors of the economy.

Zimbabwe received more than US$505 million in international remittances from January to June 2019 and indications were that the annual figure will fall slightly short of the US$1,1 billion received in 2018. Of the 2018 figure, US$620 million was the share for diaspora remittances. In 2017, international remittances were US$1,4 billion while diaspora remittances were US$699 million (Diaspora remittances share was down from US$779 million recorded in 2016).

A worrying trend is on the significant drop in official diaspora remittance figures, which continue to decline in each year from a peak of US$1,2 billion recorded in 2009. According to the Reserve Bank of Zimbabwe (RBZ), an estimated US$1 billion from the diaspora is remitted to Zimbabwe through informal channels every year.

From 1980 to 2005, international remittance inflows were less than 1% of the Gross Domestic Product (GDP) of Zimbabwe. The figure picked up to 12,5% in 2009 after the economic collapse witnessed between 2006 and 2008. Since then the figure has been averaging 7% of the country’s GDP.^[2]

According to the Zimbabwe National Statistics Agency (ZIMSTAT), the majority of the estimated four million-strong diaspora population resides in South Africa which is home to 87% of the total number abroad, while Sadc countries such as Botswana, Namibia and Zambia account for 6%. Overseas, the United Kingdom contributes close to 3%, while countries such as the United States, Australia, Canada, Germany, New Zealand, United Arab Emirates and other countries combined contribute 4% of all emigrants.

The Zimbabwean government has been going around the world pleading with international financial institutions (IFIs) and other trading partners such as South Africa, China, Russia, Botswana and the UK for a stimulus package of close to US$2 billion to jumpstart the economy. Despite owing external creditors over US$8 billion, Zimbabwe is so desperate for additional financial packages to a point of mortgaging diamonds, gold, platinum and other minerals resources to get external loans.

Previous engagements of the diaspora community by the government show that Zimbabweans in the diaspora are very keen on investing in sectors such as transport and infrastructure development, renewable energy, agriculture processing, health care, financial sector, manufacturing and tourism apart from real estate sector. To channel remittances into development projects and spur economic growth in Zimbabwe, there is need to build diaspora confidence in local financial systems and craft policies that incentivise cluster investments which tend to be large-scale.

Remittances Report by RBZ

According to figures from the Reserve Bank of Zimbabwe (RBZ), Zimbabwe recorded a 33 percent upturn in Diaspora remittances to US$466,2 million as at July 31, 2020 compared to US$349,7 million at the same time in 2019. In 2019, Diaspora remittances to the country grew by 2,6 percent to US$635 million from US$619 million recorded in 2018.^[3]

Diaspora remittances grew 48% by October 2020, as people sending money home switched to formal routes under COVID-19 restrictions.

Total Foreign Currency Receipts Report by October 2020

• 2020 Report - Total remittances into Zimbabwe in 2020 rose 42.57% to US$1.647 billion. According to the Reserve Bank of Zimbabwe, of that amount, US$1.002 billion came from individual diaspora remittances - the highest ever - stamping remittances as an important contributor to exchange receipts.^[4]
• According to the RBZ Monetary Policy presentation on 18 February 2021 diaspora remittances amounted to US$1.0 billion in 2020, a 58% increase from previous year of US$635.7 million. The increase in diaspora remittances was mainly due to liberalisation of the use of free funds in the country and improved channeling of remittances through formal channels. International remittances received through the normal banking system on behalf of International Organizations (NGOs) amounted to US$647.8 million in year 2020, a 26% increase from previous year of US$519.4 million.

Remittances a lifeblood to the foreign currency auction system

Export earnings from the mining sector and Diaspora remittances have largely provided the lifeblood to the Foreign Exchange Auction System since its launch on 23 June 2020, according to Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mangudya.^[5]

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