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Bargain hunters flock to auction system for cheap forex

27 Jan, 2023 - 00:01 0 Views
Bargain hunters flock to auction system for cheap forex

eBusiness Weekly

Business Writer

After a seven-month sabbatical, bargain hunters are flocking to the forex auction system once again amid the widening gap between the official and parallel market exchange rates.

With the gap between the official exchange rate and the parallel market exchange rate per US$1 ranging between $779,31 and $1 200 respectively, the auction system has become attractive again for bargain hunters.

A bargain hunter is someone who is looking for goods that are valued for money, usually because they are on sale at a lower price than normal.

A few months after the auction system was introduced, it started trading at a huge discount to the parallel market, with accepted bids going as high as US$45 million per week.

Authorities and market watchers blamed the discount at the official market as a major attraction for importers.

RBZ governor Dr John Mangudya accused corporates of “manipulating the exchange rate” by exploiting the gap between the parallel market and official currency prices for profiteering.

The governor expressed concern that companies were snapping up more foreign currency than they are allowed to through the Reserve Bank of Zimbabwe’s auction system, then selling it on at inflated prices.

Mangudya said some firms were accessing loans as working capital, “but diverted to third-party entities for purposes of funding purchases of foreign exchange on the auction on behalf of the funding entities.”

Growing money supply in the economy was also blamed, prompting the Government and the central bank to put in corrective measures that arrested currency depreciation and eventually reduced the premium between the exchange rates.

After the corrective measures put in place with effect from July 1, 2022, the parallel market exchange rate stabilised and traded at approximately $800 per US$1 for close to four months.

Subsequently, demand for foreign currency at the auction system fell from as high as US$51 million on May 17, 2022 to as low as an average US$11 million from October to December 2022.

However, the official exchange rate remained on a freefall since its introduction on June 23, 2020 when the rate was fixed at $25 per US$1. The Zimbabwe dollar has lost 96,79 percent of its value since then.

This year alone the auction rate at $779,31 per US$1 has lost 13,84 percent of its December 2022 closing value of $671,44 per US dollar.

At the same time, the parallel market rate has raced to $1 200 from $1 000 in December 2022 making the auction system attractive for bargain hunters once again.

Market watchers said arbitrage opportunity and the promise of settlement in 14 days were behind the growing demand for foreign currency at the auction system.

On Tuesday, accepted bids for foreign currency amounted to US$23,8 million. The last time bids were above this amount was on  June 28, 2022.

Commenting on the growing demand for foreign currency in the economy and on the auction system, Monetary Policy Committee member Persistence Gwanyanya said while they might be other factors, there are economic agencies genuinely looking for forex.

He said there are economic players with significant balances in the local currency and pushing the demand.

He said there has also been “a spike in demand for gold coins” signalling the presence of significant ZWL balances in the market.

Exchange rates in the country have historically been linked to increased money supply and large payments to government suppliers.

Commenting on the jump in the exchange rate to $779,31 from $732 the previous week with the highest bid received jumping to $825 from $765 Gwanyanya said this was actually a move in the right direction and it will lead to the correction of the widening gap.

He said bids are likely to be pushed even higher next week by economic agencies that missed this week’s allotments. Out of the 182 firms that had their bids accepted on the main auction, only 117 firms got allotments. On the SMEs auction, only 133 out of 263 firms got allotments.

“This will result in markets marching towards equilibrium,” he said.

Gwanyanya, however, called on authorities to defend the local currency by injecting more foreign currency to stem the continuous weakening of the exchange rate.

“There is need to defend our currency, treasury might have to assist the central bank,” Gwanyanya said adding that the cost of an ever-depreciating currency is higher than that of defending the currency.

Permanent secretary in the Ministry of Finance and Economic Development George Guvamatanga said it was difficult to defend the local currency as the rate is not being moved by any fundamentals.

He said with the country having received record inflows of almost US$12 billion and imports of approximately US$8 billion should be positive enough to strengthen the exchange rate.

“In 2020 we had record inflows, US$11,6 billion, almost US$12 billion, while our imports were around US$8 billion, so technically there is excess of US$4 billion. In those instances should the rate be depreciating?”

He said there is need to agree on an anchor exchange rate that can then be defended if oversold or overbought.

“Our debate should be on what is an acceptable exchange rate using a well-known formula instead of chasing an unknown number.

“If we agree on that rate, then we can be able to defend and support the local currency,” he said.

Economic analyst Kuda Mugova also differed with Gwanyanya and said while it’s important to defend the local currency, it must not be done at an artificially high exchange rate as that will mean loss for the government revenue as “less will be available to meet its own forex needs value for money” and state entities.

“It will also lead to unnecessary debts in the form of backlogs, and credit lines refunding.

‘‘What must be done is to first fine-tune the forex pricing mechanism.”

Walter Mandeya of Trigrams Investments said with demand under pressure, getting arbitrage between rates is very lucrative for rational economic players.

Gwanyanya said some economic players, with access to auction money, can even afford to sell products at prices below their South African suppliers.

“But that gap is fast closing amid the depreciating auction rate and softening parallel market rates,” he said.

A street dealer was selling the greenback at $1 100 and buying between $950 and $1 000 yesterday.

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