Isn’t it time Zimbabwe shored up its gold and forex reserves?

by Justice Zhou

Alarmist opinion about the early return of the Zimdollar is rearing its head again. This is despite the central bank authorities reassuring the public they will only be able to reintroduce it once they have enough foreign exchange (forex) or gold reserves to back it.

Forex reserves are deposits of foreign currency held by the central bank of a country, while gold reserves refer to a quantity of gold held to support the issue of currency.

Statistics on how much the bank holds in forex and gold reserves are not precise, but it’s anyone’s guess that not much has been done in terms of rebuilding them.

However, the local dollar will definitely bounce back at some point in future and hence there should be proper contingency plans and sufficient resources for its safe return. Isn’t time ripe for Zimbabwe to shore up gold reserves, then?

One of the most important suggestions put forward by economic and financial experts is for the Reserve Bank of Zimbabwe to consider building gold reserves to diversify its holdings in the run-up to the reintroduction of the local dollar.

At a time when a number of central banks are boosting their gold stocks due to its status as a safe haven amid geopolitical concerns and economic headwinds, it boggles the mind why Zimbabwe has not followed the same route.

Rather, it appears much joy is derived from seeing more of the yellow metal being commercially mined for the purposes of export, ignoring the fact that its property as a store of value can also be taken advantage of to buttress the local currency.

Bullion is reportedly Zimbabwe’s biggest mineral foreign currency earner, accounting for over 50 percent of the country’s total annual export earnings together with platinum.

Reserves play a key role in instilling confidence in the monetary and exchange rate policies of a country, and it seems gold has an edge over foreign currencies because currencies’ are more vulnerable to external risks as they fluctuate from time to time.

On the other hand, gold is a haven for investors who seek to avoid currency risk; hence its value always appreciates in times of crisis.

Nonetheless, the same should apply with forex reserves. Zimbabwe’s forex reserves also need to be propped up to provide a way in which the central bank could intervene in the foreign exchange market and manage exchange rate fluctuations, promoting a stable environment for economic growth.

In times of crisis, foreign exchange reserves have proved to be useful in absorbing the misery related to economic and currency meltdown.Investors also have more confidence or are willing to put their money in countries that have strong foreign exchange reserves and stable currencies.

When South Africa sneezes, Zimbabwe and the region catch a severe cold

by Justice Zhou

It is still too early, if not ill-conceived, to predict an apocalypse for South Africa and the region simply because international ratings agencies have just downgraded its sovereign credit rating to junk status.

The eventual downgrading of Africa’s second biggest economy is viewed as long-overdue by some critics of the incumbent government, while others suggest the move by the ratings agencies was exaggerated.

Standard and Poor’s cited the latest cabinet reshuffle by President Jacob Zuma as the reason why it arrived at that decision. In other words, political risk was deemed to be the main contributing factor. 

Fitch Ratings has followed suit, arguing the cabinet reshuffle is likely to result in a change in the direction of economic policy, whereas Moody's has delayed its decision.

However, there is no denying that when South Africa sneezes, Zimbabwe and the entire southern African region are likely to catch a cold.

With Nigeria, Africa’s biggest economy, already battling to contain a crippling recession, the continent can’t afford a fall-out from adverse shocks by yet another one of the most influential economic giants.

In fact, much of the continent isn’t decoupled because South Africa’s investment footprint in Africa grew significantly over the years. Its role, to some extent, as investor and trading partner of last resort in the region and the rest of Africa, cannot be overemphasised.

So it is very important for Zimbabwe to follow the specifics of the dramatic events taking place in the neighbouring country very closely, as any major economic trends are bound to have knock-on effects on the regional economies.

South Africa’s downgrading is another way of warning investors or lenders that there is a possible risk that the country may default or be unable to repay the money it borrows especially from international lenders through various financial instruments.

But, honestly, the move doesn’t guarantee that the country will definitely fail to repay loans. It also doesn’t mean that South Africa, Zimbabwe and the entire region should now start to quack in their boots, preparing for the much-anticipated doomsday. The downgrading may soon turn out to be a mere blip.

The extent to which Zimbabwe has in many aspects integrated with its southern neighbour explains why it matters for South Africa’s economy to be stable.

If it were to face a major downturn as a result, Zimbabwe would be one of the hardest hit because South Africa is its largest trading partner, apart from being a top investor, in a country already beset with its own economic meltdown and persistent political instability.

On top of that, South Africa hosts millions of Zimbabwean nationals most of whom work there. They are a crucial source of disposable income for their kith and kin back home, while also playing a key role in providing the remittances needed to finance Zimbabwe’s yawning current account deficit.

Greater integration and trade partnerships of this magnitude can only heighten the chances of contagion or a domino effect.

While acknowledging, on the one hand, that South Africa is experiencing an elevated political risk, on the other hand, the country’s economy has proved to be resilient in the face of unfavourable headwinds.

For instance, a poll by Reuters suggests that South Africa’s rand will be relatively stable against the dollar until the year is out.

South Africa's net foreign exchange reserves are still pretty much in a favourable position when compared with other countries in the region, showing that it has some firepower to draw on in the event of a crisis.

Economies exposed to financial crises often employ foreign exchange reserves for the purpose of intervening in the market to influence the rate of exchange.

It, therefore, would be convenient to have cautious optimism and still hope that the country will prudently handle its political challenges in due course and hence weather the expected economic storm.

Debunking Zimbabwe's currency myth

by Justice Zhou

At long last! Zimbabwe finally has a currency of its own. But how do you celebrate such an achievement if despite the introduction of the bond notes, you still face a critical shortage of them and the economy is on a bumpy ride once again?

Anyhow, it remains my strong belief that Zimbabwe’s current economic problems didn’t come about because of the much-hyped “bond currency” or bond notes. The liquidity or cash crunch was a long time coming; it’s a no-brainer!

It would be disingenuous for anyone to think that the reserve bank shouldn’t have introduced bond notes in the first place, even though they provide no ultimate solution to the country’s economic problems.

In other words, it would be a serious dereliction of duty on its part for the bank, which is required by law to perform its monetary policy functions.

At the same time, I do not believe the US dollar-denominated money will be the solution to the capital flight and meltdown that Zimbabwe has experienced since the results of the 2013 elections were announced.

There can be no doubt in my mind that the gradual outflow of capital has been the result of lack of confidence in the face of negative political events. The run on the banks, coupled with the smuggling of the US dollar out of the country, have been the last straw, adding to already existing liquidity woes.

Ironically, “the bond currency” or notes were introduced as a measure to stem the same liquidity problems or cash shortages that some are now apportioning all the blame for Zimbabwe’s meltdown on. This is quite unfortunate.

The solution to Zimbabwe problems doesn’t lie in currencies, no matter which one we introduce, the source of these problems isn’t necessarily the currency.

Perhaps, because of the misery of hyper-inflation which the Zimdollar era brought on us, we have obsessed ourselves with currency to an extent that this has clouded our focus on the real source of these economic problems.

Here are some of the most important issues that Zimbabwe needs to watch out for to gauge how fragile our economy is:

First and foremost, we should pay attention to the fragility of the banking system. When commercial banks are frail, they may not be in a position to lend or make new loans. This is not good because they are the backbone of consumer spending and corporate investment.

Without stability, lenders may only direct much of their efforts towards deleveraging their balance sheets and strengthening their liquidity buffers in order to cope with deteriorating depositor confidence, rather than creating loans to help boost economic growth.

The overall ratio of the local banking sector’s loans to deposits isn’t encouraging at all, also with a very high possibility that the lenders are highly-leveraged or rely too much on borrowing from abroad to fulfil their domestic lending duties, meaning that they are exposed to possible failure.

Secondly, Zimbabwe’s current-account balance is characterised by a yawning deficit at a time when the portfolio inflows, diaspora remittances and the inward foreign direct investment flows needed to finance it are scarce and exports revenues are low.

Although not classified as a highly-indebted country, and hence not qualified for debt-cancellation, Zimbabwe has to repay or roll over its sovereign debt. It has already gone to the IMF with cap in hand for loans without any success. Alternatively, it must run down its reserves, but these are not available.

In a nutshell, Zimbabwe’s problems are not as a result of currency. There’s more to them and we need to take a step back, reflect and apply our critical thinking skills.

Otherwise, you might soon realise that politics is the epicentre of what has roiled the local markets and put our economy back on the skids. If it is, then that’s probably were the solution lies.