Zimbabwe: A hand-to-mouth nation

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Prudent management of finances for individuals, companies and even nations demands that reserves be held to provide a cushion against unexpected changes in circumstances.

Report by Collins Rudzuna

For individuals, one would still need money for things like rent and food, in the event of losing a job. Companies would still need to pay salaries and other costs even if sales temporarily dry up.

For countries, foreign-exchange reserves are held to protect against external crises and assure lenders that the country is able to meet its debt obligations.

Although there is no standard cast in stone on how much reserves a country should hold, a common rule of thumb is that reserves that can cover three months’ worth of imports are generally adequate.

Countries with export-based economies such as China, Japan and Saudi Arabia are able to maintain large reserves which would be able to cover more than two years’ worth of imports. These large stashes of foreign currency usually allow these countries to influence exchange rates to keep their exports attractive.

Other countries typically target to maintain a few months’ cover. America, the issuer of the world’s reserve currency, the United States Dollar, does not need as big a buffer as other countries do. Its holdings can go as low as a month’s cover without causing concern.

In its Article IV consultation report on Zimbabwe released in September, the International Monetary Fund (IMF) revealed that Zimbabwe was holding international reserves covering only 10 days of imports.

Effectively, the country had no cushion against external shocks. Not only was the cover maintained inadequate, but there was no foreseeable solution to the situation. As it currently stands, government does not seem to have any feasible strategy to increase reserves over time.

To build up reserves would require either sustained current account surpluses or substantial capital inflows.

So how dire is this situation and to what does it translate?

Firstly, for a country which is highly dependent on imports for critical supplies such as food, medicines and fuel, it means that in the event of any interruption in foreign currency inflows, we are only covered for 10 days! That is a very vulnerable position to be in.

As a nation we are surviving from hand to mouth.

Another reason why it is not desirable to maintain such low reserves is that this affects the creditworthiness of the country. In the eyes of potential lenders, a country with low reserves is highly likely to default on debt repayments.

Zimbabwe is already US$10,7 billion in default on its debts and the country’s creditworthiness has been compromised. Increasing our reserves and perhaps making token repayments would signal to financiers that the country is on a path to recovery.

It is unrealistic to expect Zimbabwe to achieve a reasonable balance of payments surplus in the short term as there are many structural adjustments that need to be made for this to be possible.

One of these is to improve the balance of trade by boosting exports and minimising imports. Exports can be boosted by increasing productivity and, therefore, output. This is especially so with exporting sectors such as mining.

To achieve this, a significant amount of capital inflows is required, either as debt or foreign direct investment. This brings us back to the issue of having policies which attract investors. To date, most major mining houses have not reached their full operating capacity and lack of capital is their number one impediment. Mining products already constitute 66% of exports and have potential to contribute more if production is increased.

Another way to deal with low reserves is to decrease imports. In doing so, it should be borne in mind that the country is heavily reliant on imports of food, clothing, fuel and other basic necessities which cannot be done away with.

Decreasing imports would therefore have to be done in a methodical way which targets those imports which are not essentials and which could be substituted with locally-produced goods. Increasing import duty on such goods is one way of discouraging their importation. Grey import motor vehicles are perhaps the most often cited example of undesirable imports. Curtailing their importation would need to be accompanied by the establishment of a reliable and safe public transport system.

In the long term, even food imports could be substantially reduced through increased agricultural production. In fact, increasing agricultural production would then feed into the manufacturing sector, reducing input costs and making them more competitive relative to imported processed foods.

Zimbabwe has been self-sufficient before in food production and adopting the right policies can get us back there. Agricultural technology has improved greatly and there is potential to surpass even the previous production highs and have enough surpluses to export.

Although not an immediate concern since the country is in default anyway, negotiating for debt amnesty is another way of avoiding future obligations.

Applying for relief as a ‘Highly Indebted Poor Country’ under the IMF-World Bank joint programme would be one way to do it but so far government is reluctant to take this route.

There is urgent need to address the low levels of reserves in the country. Hopefully it will not take an unexpected event to wake up the responsible authorities to this fact. Given the current state of world economics it is not inconceivable that shocks may happen anytime and it is better to be prepared in advance.

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