Zim needs to build foreign currency reserves

Published: 10 April 2014

Zimbabwe needs to build its foreign currency stock if the country is to maintain positive economic growth prospects.

Foreign currency reserves typically play a significant role in leveraging a local currency, however this is not the case currently due to the use of the multicurrency system.

But an adequate stock is still significant in ensuring that the country is insulated from external shocks.

This entails that a need to improve local the country's export levels, while at the same time reducing imports coming into the country. Latest figures indicated today at the BuyZimbabwe conference paint a bleak picture.

"As at February 2014, our import bill was at a staggering $967 million against exports of about $470 million, indicating a doubling in imports," said deputy Finance minister Samuel Undenge.

Nonetheless, building foreign currency reserves should be carried out by encouraging local industries to produce not just for the internal market but for the region and globally.

Traditionally, central banks use foreign currency reserves - held in either the United States dollar, and increasingly the euro - to support economic growth by ensuring there is a buffer to defend the local currency and also guaranteeing for liabilities such as external debt.

Improving the country's export sector can result in a more positive balance of payments position for the country.

Treasury has already indicated that it is targeting an initial import cover of three months by the end of this year, which is however below the six months threshold target within the Southern African Development Community (Sadc).

University of Zimbabwe professor of economics Tony Hawkins contends that improving the balance-of-payments position is the critical factor in addressing the country's liquidity challenges.

The current problem is however that Zimbabwe's business model emerged from the Zimbabwe dollar era and has largely remained stuck in that old order.

Nonetheless, improving foreign exchange stock will also assist the country in respect of its debt strategy.

Despite rebounding sectors such as the agricultural and mining sectors, Zimbabwe's foreign currency situation has remained depressed due to the high level of imports that are coming into the country.

Improvement in the performance of both local industry and exports largely hinges on the implementation of our Industrial Development Policy and the National Trade Policy.
- BH24