eBusiness Weekly
Business Writer
The Reserve Bank of Zimbabwe disregarded industry recommendations for a proper Dutch Foreign Currency Auction system and is now struggling to meet forex demand in the economy leaving players turning to the unregulated and volatile parallel market as a source, according to industry players.
It also emerged further recommendations by the business community to fine tune the auction system also seem to have been ignored leaving the system falling short of being efficient and effective as an exchange rate discovery platform.
The auction rate is increasingly being alienated in the market now dominated by the use of the parallel market rates in the pricing of nearly goods and services in formal providers.
While foreign currency generation in the economy from both domestic and international sources has been on a growth trajectory, demand for the greenback, for transactions and as a store of value has continued to soar.
As such, the local currency has rapidly depreciated on both the official foreign currency auction system and parallel market.
Since the beginning of the year, the local dollar has depreciated by 44 percent on the auction system and is worse off on the parallel market.
On the auction system the Zimbabwe dollar is trading at $155,14 to the greenback as of Tuesday but on the parallel market, street dealers are quoting anything between $300 and $360. At the beginning of the year the parallel market rate was trading between $210 and $220.
Such a situation is seen as unsustainable and punishing to businesses that now have to generate their own foreign currency or source from the parallel market.
Attempts by the central bank, on numerous occasions have failed to tame the unhinged exchange rates.
Following its latest Monetary Policy Committee meeting on the first of April, the central bank put up its interest rates.
The bank policy rate was increased from 60 percent to 80 percent per annum while the medium-term bank accommodation facility interest rate was reviewed upwards to 50 percent per annum from 40 percent.
Further, the central bank tightened monetary policy by reducing the quarterly reserve money growth target from 7.5 percent to 5 percent for the quarter ending June 2022.
Towards the end of March, the central bank also released US$100 million to expunge the foreign currency backlog at the auction system.
The backlog, going as far back as eight weeks, was also seen as a distabilising factor to the exchange rate as businesses facing delays in accessing the money turned to the parallel market.
The interventions by the apex bank were meant to deal with factors that were “destabilising the foreign exchange market.” But these measures are seemingly failing to term the runaway exchange rate.
Sentiment among the business community with regards the backlog and the auction system in general is that the central bank has not fully implemented the Dutch Auction system.
The Confederation of Zimbabwe Industries, one of the major proponents of the auction system, and whose members are the biggest beneficiaries of the auction system, are on recording saying the auction system, in its current format, is not what was recommended as standard Dutch auction rules have been violated for a while now.
There are elements of the auction system, that CZI is not happy with and believe is the source of the currency instability.
Delays in settlement of allotted bids is one such factor which CZI believes is stemming from the RBZ auctioning unavailable funds.
Authorities must auction only what is available on the day of the auction, have a minimum bid rate to accept informed by the previous auction and available bids and only pro rata the lowest bids if resources are still available, said CZI in its 2021 inflation and currency developments round up report released in February this year.
With the auction system failing to achieve efficient price discovery, CZI further recommended the RBZ to indicate the amount of forex available at least 24 hours before the auction begins.
But none of these recommendations have been implemented by the central bank, according to CZI chief executive officer Sekai Kuvarika.
Economist Reneth Mano said in order to give the auction a fighting chance, it has to be removed from the clutches of the centrals bank.
“Management of the auction must be completely decoupled from the regulator so that violations of auctions rules are penalised by RBZ as the regulator.”
Other market watchers believe the auction was flawed from the start and its high time it paves way for another exchange rate discovery system.
Economist and Zimbabwe National Chamber of Commerce chief executive officer, Chris Mugaga, suggested that there is now need to move away from the auction system.
“Let’s embrace market forces and this will help reform the auction towards a market price. Let’s also have a relook on whether to keep the priority list which is also causing market distortions as other economic players are excluded,” Mugaga said.
Professor Ashok Chakravarti, a member of the RBZ’s Monetary Policy Committee also believes the local currency still has a fighting chance and the newly introduced willing-buyer-willing seller (WBWS) is a step towards market liberalisation.
He, however, said there is need for patience as it is not easy to create a foreign currency trading system after a 25-year absence.
He said the auction system was a first step and the WBWS is the next step.
“We have to do it step by step and should not be discouraged by exchange rates we are seeing on the parallel market. There is no reason why de-dollarisation should not succeed.
“We are doing everything fundamentally right and have dealt with the fiscal deficit, money supply and trade deficit. This should give us a strong currency, but it needs time and for everyone, both business and the private sector to be constructive.”
Walter Mandeya, a market analyst with Trigrams Investment said while the auction system has its shortcomings it has been a very effective way to help the economy transition from the grossly flawed forex regimes to a more market driven system.
“That said, the deficiencies of the current auction system require some considered analysis before a wholesale change in the system. We believe more information in the form of hard data is required to correctly prescribe the nature and format of changes required.”
Mandeya said the achievements of the auction system are significant even though the markets have continued to demand more forex than is available.
“The gap between the auction system rate and the alternative market rate is a sign that official channels are falling short in meeting demand.”
