Monday 17 April 2017

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.

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