ZIMBABWE'S international reserves are low at less than a month of import cover, far below the benchmark required for dollarised economies, leaving the country susceptible to external shocks, a World Bank (WB) recovery note has warned.
"International reserves remain very limited, estimated at 0,6 months of import cover, far below the three months benchmark for dollarised economies, thus increasing the country's vulnerability to external shocks," the bank said in a three-year Interim Strategy Note for Zimbabwe.
Although the import cover - the number of months of imports that could be paid for by a country's international reserves and as such gives a clear picture on the country's preparedness to use its reserves in the event of a crisis - is low, there is a slight improvement from last year's.
A report by the International Monetary Fund (IMF) last year said the country had reserves covering only 10 days of imports.
The WB's strategy document said the outlook remained further clouded by the possible "compression of exports [due to global economic slowdown] and the risk of disorderly unwinding of vulnerabilities in the banking sector".
The warning by the WB comes at a time Zimbabwe had converted its Special Drawing Rights (SDR) holdings totalling US$260 million to meet critical needs from the about US$400 million given to the country by IMF to help shore up its reserves.
In 2009, IMF gave members US$250 billion to shore its reserves following the global financial crisis.
Zimbabwe has promised IMF that it won't make any further conversions on the SDR holdings.
International reserves constitute an acceptable form of payment between central banks of different countries. It can be in the form of gold or currency.
In a dollarised environment, reserves are not only insurance against external shocks but also a key tool for managing domestic financial stability.
International reserves can also be used to meet timely international payment obligations, for instance, imports needed for the economy.
Reserves can also act as a boost to the country's creditworthiness when access to international capital markets is difficult or impossible.
International reserves act as a fall back when an economy experiences a drop in revenue and would need to fall back on their savings as a life line. A good external reserves position would readily provide this cushion and facilitate the recovery of such economies.
The World Bank said Zimbabwe's external position was precarious with current account deficit easing to 22% of the Gross Domestic Product (GDP) from 31% of GDP in 2011.
Current account - the difference between a nation's total exports of goods, services and transfers, and its total imports of them - is closely followed as an indicator of trends in foreign trade.
The precarious current account position has been further worsened by deteriorating exports.
This comes at a time imports have been on the rise, widening the trade deficit.
In the first quarter of the year, imports stood at US$1,66 billion against exports of US$813 million.
The majority of the imports were consumables, fuel and motor vehicles.
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