THE launch of the gold-backed structured currency has stirred debate on the adequacy of Zimbabwe’s paltry foreign currency reserves while at the same time exposing the country’s holdings as a meagre fraction of those held by regional peers despite the country being home to a vast mineral endowment, The NewsHawks has learnt.
BERNARD MPOFU
To shore up confidence in the currency, incoming central bank governor John Mushayavanhu said the country’s new currency, Zimbabwe Gold (ZiG), will be fully backed by Zimbabwe’s reserves of US dollars and precious metals, particularly gold.
He also pledged to end a long-running practice of the bank issuing more money to finance government spending.
He said foreign currency balances will be accumulated through market purchases from the 25% surrender requirements as well as sale of some precious metals received as royalties.
“As at 5 April 2024, the Bank’s reserve asset holdings comprise of USD100 million in cash and 2 522 kg of gold (worth US$185 million) to back the entire local currency component of reserve money which currently stands at ZW$2.6 trillion requiring full (100%) cover of gold and cash reserves amounting to US$90 million,” Mushayavanhu said.
“The total amount of gold and cash reserve holdings of US$285 million represents more than 3 times cover for the ZiG currency being issued.”
This has stirred debate on the adequacy of the reserves in anchoring the new currency given that regional peers with far more stable economies had more in their vaults.
Critics say at current levels this is not any different from the US$200 million loan facility from Afrexim Bank which the government hyped when it launched bond notes in 2016. Bonds notes are currently on their death bed and will be demonetised by month-end.
Ahed of the launch, an independent Zimbabwean economist and director at the Centre for African Governance Development at Durban University of Technology in South Africa, Gift Mugano, said Zimbabwe had insufficient reserves to back the new currency.
“Our total reserves is estimated at US$291.8 million if we factor in the additional US$100 which has been announced by the RBZ. This year, we are anticipating to import goods worths US$9 billion, that is, US$750m per month,” Mugano posted on micro-blogging site X.
“Our reserves (2.6 tons + US$100m) = US$291.8m can only cover 11.7 days of the months if we are not exporting anything. In short, our reserves are not enough to give us at least one month import cover.
“Basic economic theory tells us that we must have at least six (6) months import cover to guarantee currency stability if all things are equal. This is a priori requirement. In our case we have approx 1/3 month cover! This is not enough to support the structured currency even if we are still going to receive forex inflows from exports, diaspora remittances, credit, etc.”
All of Zimbabwe’s neighbours, Botswana, Mozambique, South Africa and Zambia, have foreign exchange reserves running into billions each.
Compare Zimbabwe’s US$575 million reserves with those of its demographically small, yet well-run neighbouring country Botswana which has foreign currency reserves of about US$5 billion, for instance. Botswana has US$4.8 billion in foreign exchange reserves. This is more than eight times bigger than Zimbabwe’s reserves.
If Botswana adds its diamond reserves to the equation, its reserves become well over 10 times more than Zimbabwe’s. For context, Botswana’s foreign exchange reserves increased to US$4.8 billion in November last year from US$4.7 billion in October 2023.
Foreign exchange reserves in Botswana averaged US$6.9 billion from 1998 to 2023, reaching an all-time high of US$10.3 billion in April 2008 when Zimbabwe was reeling under an economic meltdown and hyperinflation due to leadership, governance and policy failures.
Botswana’s reserves hit a record low of US$4.1 billion in September of 2022, worrying that country’s leaders.
Reserves play an important role in countries’ overall defences against shocks mainly during economic crisis.
Persistence Gwanyanya, a Harare-based economist and member of the Reserve Bank of Zimbabwe’s Monetary Policy Committee, however defended the government’s position, saying Zimbabwe had adequate reserves.
“We are in a multi-currency system and more than 80% of transactions are in US dollars and as such all the importers, I hear they talk about the import cover — the importers have the opportunity and access to foreign currency from the domestic transactions for use in their import requirements,” Gwanyanya told The NewsHawks on the sidelines of the Monetary Policy Statement launch.
“The question about reserves does not arise in a multicurrency and specifically in our situation where even the ZiG money is fully covered by what we have in reserves.”
Countries with adequate reserves generally avoid huge declines in national output and consumption, and are able to handle outflows of capital without experiencing a crisis.
However, holding reserves also entails costs, both directly for each individual country, and globally through macroeconomic imbalances.
Economists and international financial institutions like the International Monetary Fund say the traditional rules of thumb that have been used to guide reserve adequacy say countries should hold reserves covering 100% of short-term debt or the equivalent of three months’ worth of imports.
At peak in the 1990s, Zimbabwe used to have more than three months’ import cover before the country plunged deep into a prolonged crisis which has destroyed the economy and impoverished the people.
An empirical analysis by the International Monetary Fund suggests that three months of import cover remains broadly appropriate for countries with flexible exchange rates, given estimated benefits provided by reserves in reducing both the probability and impact of shocks. Its analysis also suggests that countries with good institutions and policies need lower levels of reserves.
Economic commentators say Zimbabwe’s deteriorating economic problems cannot be resolved by merely launching a new currency and bleating about its measly reserves.
Compared to its neighbours, Botswana, South Africa and Zambia, Zimbabwe’s reserves are paltry.
