Record US$1bn diaspora remittances flow in as lockdowns throttle informal channels

Zimbabwe remittances
Remittances help keep Zim afloat, but global pressures may hit incomes (pic: Reuters)

Formal diaspora remittances amounted to a record US$1 billion in 2020, up 58% from the previous year, central bank data showed on Thursday, partly reflecting how COVID-19 lockdowns limited informal money transfer channels.

Remittances for 2020 exceeded the country’s gold  and tobacco exports of US$995 million and US$782 million, respectively, for the year. Only platinum exports, which earned US$1.77 billion, brought more forex into the country.

“In the year 2020, diaspora remittances amounted to US$1.0 billion, a 58% increase from the previous year of US$635.7 million,” the RBZ said.

South Africa, host to Zimbabwe’s largest non-resident population, accounts for 40% of all formal remittances into Zimbabwe, according to a report by FinMark. The FinMark study estimates that as many as 68% of all remittances to Zimbabwe from South Africa are informal, amounting to 9,9 billion rand (US$747 million) in 2018.

South Africa, the African country worst affected by COVID-19, closed its borders for much of last year as it battled the pandemic, limiting options for informal movement of cash into Zimbabwe by migrants based in that country. 

In its latest monetary policy statement released on Thursday, the Reserve Bank of Zimbabwe (RBZ) also attributed the sharp increase in remittances to its decision to restore widespread use of foreign currency in the economy, reversing the government’s earlier decision to end dollarisation in June 2019.

“The increase in diaspora remittances is mainly due to liberalisation of the use of free funds in the country and improved channeling of remittances through formal channels,” the central bank said.

Meanwhile, the RBZ has upheld the official GDP growth forecast of 7.4% for 2021, despite the second wave of COVID-19 infections, which forced government to impose tough lockdown measures at the beginning of the year. The central bank also expects inflation to close the year below 10%, significantly down from 348.6% in December 2020.

“The measured optimism is based on the expected significant growth of the
agricultural output in 2021, as a result of the good rainy season, fiscal
sustainability and the Bank’s focus on price and financial system stability,” RBZ said.

“It is in this context that the primary focus of this Statement is to ensure that inflation is under control and that the foreign exchange auction system is sustained to support the growth of the economy.”

Some US$834 million has been traded through the foreign exchange system and the central bank says more than 70% of total foreign currency allotted at the auction has gone towards import of raw materials, machinery and equipment. Pharmaceuticals, chemicals, fuel and electricity
account for 11% of the total allotments.

Exporters currently provide 70% of the forex traded on the auction, through the 40% they are required to surrender to the central bank in return for Zimbabwe dollars.

The central bank also signaled its intentions to keep a tight leash on liquidity, increasing statutory reserves from 2.5% to 5% for demand deposits, while maintaining the old rate of 2.5% for long term deposits.