It’s a bit premature for the Reserve Bank of Zimbabwe (RBZ) to start thinking about building up gold and foreign currency reserves as it has other foreign obligations that it is currently struggling to meet, market watchers have said following comments by the Monetary Policy Committee that there is need for the central bank to gradually build up reserves. Foreign reserves, the US dollar in particular, are used as buffer or import cover in times when the economy fails to generate adequate resources to make foreign payments.
The reserves can also be used to defend the local currency from free falling when there is a shortage of foreign currency in the market.
When the market is dry but foreign investors are looking at repatriating their earnings, the central bank should be in a position to inject foreign currency to make sure foreign obligations are met, including sovereign and commercial debts. And in its first meeting in 2020, the Monetary Policy Committee “recognised the need to gradually build up gold and foreign currency reserves to boost confidence in the domestic currency as well as strengthen investor sentiment.”
“If Zimbabwe can build up good reserves, these would certainly help stabilise the local currency and the country would recover the respect it once had from the International Financial Institutions. This would certainly make the country more attractive to investors and would improve our access to credit and loans needed for major infrastructural developments,” economist John Robertson told Business Weekly. He, however, said the central bank is not in a position to start building up both forex and gold reserves.
“If the country is to build its reserves for example, then it will have to cut down on its import bill,” he said.
While Zimbabwe has been able to generate billions of dollars in foreign currency earnings, its huge appetite for imported products has seen it struggle to meet its obligations. According to the World Bank’s World Integrated Trade Solution, in 2018, the country’s exports proceeds amounted to US$4,03 billion but this was US$2,2 billion short of the US$6,25 billion import bill. By October 2019 the import bill had reached US$3,9 billion against export proceeds of US$3,3 billion, a US$600 million gap. Some of the imports are thus financed using remittances which were estimated at US$1,77 billion in 2019 by the World Bank.
This, analysts believe, makes it difficult for the country to start building its reserves unless the import bill is reduced. This is however, unlikely in the short to medium term as production for both primary and value added products in the country is low or falling.
Zimbabwe would have to be food self-sufficient if it is to reduce its import bill, but a combination of both natural and man-made events has meant the country will have to import the bulk of its food requirements. In 2019, Zimbabwe experienced damaging natural disasters such as drought and two cyclones which left the country requiring at least 800 000 tons of maize imports. Market watchers however, believe with the right investments and policies in place, the maize shortfall would not have been huge.
“The country is earning foreign currency and building up foreign currency reserves would require that we spend less on imports than we are earning from exports,” Economist John Robertson told Business Weekly.
“The country also has many debts to pay and it should never try to accumulate either gold or foreign currency while the money, or the value tied up in gold stocks, could be used to settle debts.”
The country’s external debt stood at US$8 billion as at end September 30, 2019 according to the 2020 National Budget Statement. There are other external obligations that might not have been captured in the budget including the US$1,2 billion that the RBZ took over from the private sector following the change from a multi-currency system to exclusive use of a local Zimbabwe dollars for all assets and liabilities. As a result, any attempt to build up on foreign reserves might end up crowding out the private sector or further weaken the local currency as demand for hard currency grows.
The local currency is still to find its footing as the continued demand for foreign currency has seen the exchange rate weaken from trading at 2,5 per US dollar to trading at above 17,38 as of this week. Analysts say the continued weakening dollar is indication enough that the country is not generating enough foreign currency to start building reserves.
“This (building reserves) could happen if we can increase our export earnings, or if we are lucky enough to see the value of our exports increase on world markets,” said Walter Mandeya of Trigrams Investment.
Prospects of building up gold reserves are also dim as deliveries to Fidelity Printers and Refiners (FPR) are significantly reduced due to smuggling among other reasons. Gold deliveries to FPR slumped 16,8 percent in 2019 to 27,7 tonnes. However, due to forex demands from both miners and the central bank, accumulating gold in quantities big enough to impress investors will prove difficult. Mandeya suggests if the RBZ is to wean off everyone from accessing foreign currency from the central bank then maybe some reserves could be build.
“There is more than US$800 million at any given time in our banks, but that money belongs to the private sector. The RBZ should put an efficient system in place and let market forces determine how the foreign currency is allocated. The RBZ can then reserve what it retains from exporters (for example 45 percent from gold miners) for market interventions.”