- The auction system is faring good in many respects
- Despite helping to moderate the rate of ZW$ depreciation, the auction market has reflected some significant imbalances in the economy
Harare – The forex auction system introduced by Reserve Bank of Zimbabwe (RBZ) on June 23, 2020 is being hailed by analysts and the corporate world as the main driver of exchange rate stability being experienced since the turn of Q3:2020.
The auction system is faring good in many respects. The number of daily trades has significantly improved relative to the interbank system used prior to March 2020. Statistics show that an average of US$5 million is now exchanging hands per day relative to US$2 million when the interbank system was initially introduced in 2019. Also, the auction system is now better in determining the ZW$ market value relative to the previous interbank when RBZ was instituting trading caps as circuit breakers in controlling the rate movements.
To date, a cumulative total of US$978.4 million has been traded in 37 auction weeks. Raw materials, machinery and equipment have a lion’s share having been allocated about US$583.5 million, which translates to 60 percent.
Theoretically, one can now go to RBZ auction via their respective bank and bid for US dollars with whatever rate they like. If you bid with the lowest rate than the entire market, you will be the last to be served and if you bid higher than the rest of the market, you will receive forex first but at your bidding rate. The RBZ is only screening and rejecting those bids which are not eligible on the priority list and having overdue CDIs, outstanding bills of entry (BOEs) and or with sufficient funds in their FCA accounts.
However, despite helping to moderate the rate of ZW$ depreciation, the auction market has reflected some significant imbalances in the economy. For instance, the auction is hurting exporters big time. It is reported that about 60 percent of forex traded on the auction is coming from exporters through export retention thresholds. An exporter is now legally bound to surrender to RBZ about 40 percent of their forex earnings in exchange of ZW$ at the going exchange rate.
It is this amount which other non-exporters are accessing on the interbank. Given a wider gap between official exchange rate (ZW$83.98) and parallel rates (ZW$120), those accessing forex using official channels are making huge exchange rate gains. Why? Because prices in shops are benchmarked with parallel rates but forex is accessed at a lower official exchange rate. This is probably one of the reasons why forex demand has increased disproportionately while recovery in economic activity is very slow.
The auction system has also created an arbitraging avenue as the RBZ governor is on record admitting that some players are now borrowing ZW$ loans from banks to access cheap cash on the interbank and sell it on the parallel market at a premium 40 percent above RBZ’s rate. “One of foreign exchange auction rules requires banks to ensure that applicants have enough local currency in their accounts to finance their bids. However, it has come to the attention of the Bank that some banks are not paying particular attention to this requirement and have instead been extending overdraft facilities to finance their customers’ bids,” said the Bank in a statement recently.
In my view, monthly interbank trade is providing enough cover for ‘critical’ monthly import needs since the balance is being largely offset by direct import by importers using their free funds as well as remittances. For instance, last month (February) about US$146.7 million was allocated on the interbank and according to RBZ figures, the country requires US$100 million per month for industry and critical imports. Then if that is the case, what is driving forex demand and parallel market premiums apart from increased market liquidity due to increased government spending in recent months?
All roads point to the activities on the auction market. In a statement released on March 26, RBZ indicated that it banned about 12 entities from participating in the exchange auction after they were found to be violating exchange rules while about 62 entities are under investigation (close monitoring).
The forex auction is also beginning to show lack of transparency. The Bank has published 100 entities as top beneficiaries of the 2020 interbank trades gobbling combined US$290.9 million while remaining large bulk of US$348.5 million is recorded under “other companies or individuals.” It is highly likely that these are government ministries and a top brass of connected individuals getting cheap forex at the auction for consumption at the expense of investment by companies. This validates an earlier claim by the then MPC member and renowned economist Eddie Cross that government entities and ministries are flocking to the auction for forex.
In my view, every institution (private or public) should access the auction as long it meets prescribed requirements. However, by virtue of their ownership, parastatals and government ministries will be given first priority even if other players are offering higher bids. At the end of the day, millions will be traded on the auction but with reduced expected magnitude influence on the exchange rate, prices and economic activity.
Now is the time for the Bank to tighten its grip on the foreign exchange auction and purge unscrupulous players who are motivated by profiteering at the expense of economic welfare for the majority. The success of the auction in price discovery also depends on level of transparency exhibited, any lack thereof is detrimental. Exchange rate stability should be prioritized since it has enormous economic benefits leading to stable prices and increased investment, foreign and domestic.
So, bold decisions should be made quickly if exchange and price stability currently enjoyed is to be sustained in the long term. The auction should be reformed and I do not see any reason apart from profiteering that can explain why one is willing to access taxpayers’ funded forex but unwilling to price their goods using the foregoing official rate.
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