eBusiness Weekly
Now that the banks have been thrust into the lead role in providing foreign currency for their business and other approved customers, and so at the same time upgrading the interbank rate to incorporate the bulk of foreign currency dealings, they need to understand how rates vary and how other economic factors affect rates.
It is fairly obvious over what has been happening in the last month, since the banks became the main source of foreign currency for the net importers, that they are still moving up to speed, and to a certain extent are still trying to convert from the simple easy life they were enjoying to acquiring the skills to cope with currency trading.
Having to learn this in a remarkably volatile environment, where first the Zimbabwe dollar slumped on the wholesale auctions and then rose in value, both movements being large movements, has simply made life more difficult still.
But one thing that all banks, and especially their treasury rooms, have learned is that prices can fall as well as rise, and in this particular case we are talking about the price of a US dollar. But the dealers are getting better.
Yesterday’s auction, where there was no attempt to chop ultra cheap bids off the bottom, saw the top bid of $5 400 just eight percent higher than the bottom bid of $5 000.
Tuesday’s auction did see the gap narrow to 6,73 percent, but the lowest bid was not allotted as whatever formula the Reserve Bank of Zimbabwe uses to moderate the ranges thought it was too far below the general run of bids.
Technically this rejection of bottom bids, four at the Thursday auction last week and one on Tuesday this week, is interfering with market forces. On the other hand there is justification but mainly when the bottom bids are below the clustering of the rest of the bids.
But even so, the Reserve Bank was approving bids that varied by 30 percent on Tuesday last week, with the previous record, set on the second wholesale auction on 13 June of 21 percent. This week the just under seven percent and the eight percent were the lowest gaps in the eight whole sale auctions.
The size of the involvement of the banks can be seen that in these eight wholesale auctions in the 30 days between the first on 7 June and yesterday, the banks were allotted US$65 856 310, just over 90 percent of the US$73,166 464 they bid for. Most of the unallotted bids came from the earlier auctions where bids exceeded the amount available, but not by much.
The only really bad auction when it came it the amount available compared to the amount desired was the third, on 16 June, when just over 65,7 percent of the bids were allotted.
The second worse was the 81 percent on Thursday last week but that was not because of any shortages of foreign currency on offer for sale, but rather because half the bids were thought to be seriously underpriced.
The amount direct importers could buy in their five auctions was US$25 million, and they bought little more than US$16 million, thanks to the very small total bids last week and this week.
So the banks are now running the foreign currency supply for most of their customers and this requires a new set of skills.
Basically Zimbabwean banks have never really done anything serious in foreign currency dealing. In the colonial era Southern Rhodesia was in the sterling area and just took the Bank of England rates. Then in UDI there were definitely fixed exchange rates, even after 1971 when President Richard Nixon tore up the Bretton Woods system by decoupling the US dollar from gold.
But Ian Smith kept blithely on with the same US dollar rate which he could do with his steel wall between external and internal business and jail time for any local person holding foreign currency.
The value of the Zimbabwe dollar did move a bit after independence, although the allocations of foreign currency came from the Reserve Bank direct to each importer, with the bank just being the messenger.
With ESAP there was some attempt to have a weekly auction, but that was quickly abandoned, and right through the hyperinflation official foreign currency was direct from Reserve Bank to user at rates set by the Reserve Bank for each transaction.
Even after the local currency was reintroduced, the interbank market was so trivial that there was little action, and then the auctions for importers handled most of the foreign exchange dealing, which again excluded the banks as active players although they were the conduit for the bids and the allotted funds.
Now banks have to work for their living, with the tutorials coming in a very trying time. Already there are banks out there who in the last two weeks bought US dollars for as much as $7 350 each, the top bid on 20 August, six percent about the weight average, and there were still banks last week buying US dollars on the auction for $7 155.
With the interbank rate, the weighted average for yesterday’s second auction of the fifth week, now at $5 251 it is fairly obvious that anyone with $6 000 dollars, let alone $7 000 dollars, is going to find it very hard to find a customer.
Trying to preserve prices is not really an option, since clearly some banks are managing to sell at far lower sums. Even the three days this week when banks set the interbank rate on the weighted average of their own dealings, rather than what they were bidding at auctions, the rate only crept up slightly from the auction weighted averages.
That suggests that banks with expensive currency in stock were starting to mark down, but also that they were not selling a lot as the interbank rate is a weighted average and if you do not sell much you do not make much impact on the rate.
The narrowing of the gap between the top bid and the lowest bid at least shows that whoever is setting the bid for each auction is now thinking seriously and that banks are probably now all operating on a wider range of factors, rather than just making the assumption that the Zimbabwe dollar would forever continue to drop in price.
On that assumption an overbid would simply create stock for a couple of weeks until the average price caught up. Now that is no longer so.
So some banks will have to take a modest loss, not a lot since a $7 000 dollar can probably still be sold to some customers at a bit more than the interbank ask rate, although not that much more.
Fortunately the Reserve Bank as regulator has been keeping banks properly run and highly solvent, and with the average bad loan book being trivial, and the regular fee income for almost everything else, no bank will take a damaging hit if they have to lose a bit in their currency dealing. And there are still almost six months to get the profits and potential dividends up.
Banks and others are now expressing concern that all the inflows of foreign currency are coming from the Ministry of Finance and Economic Development, being the 25 percent of export earnings that exporters must sell to Government. Everyone would like to see some private sector inflows into the banks.
Well yes. But the problem is that holders of foreign currency do not have to sell foreign currency to buy stuff in domestic markets.
They can use their US dollars and Zimbabwean businesses will be delighted to take them off the exporters. The Zimbabwean businesses will tend to use those US dollars to at least partially fund their own imports.
With all these direct transactions in foreign currency the normal role of the banking sector, in buying their foreign currency from those who need local currency, is extremely limited. There are few holders of foreign currency who want to sell. So the main supply remains that 25 percent where the options do not exist.
So the gradual movement towards a more local currency economy requires growing confidence that the Zimbabwe dollar will not have convulsions again, growing use of that currency, which the Government is now insisting on for taxes, and perhaps more activity by the banking sector in encouraging local currency use.
The banking sector has moved now from just a bunch of businesses that count cowrie shells and keep every 20th one.
They have to become far more active participants in the economy and that means their role increases and their influence increases. They need to have the skills to fulfil those new roles, at an advanced level, and they need to use their newly-won influence wisely and carefully.
