eBusiness Weekly
The Zimbabwe dollar stabilised this week through two wholesale bankers’ auction at around the exchange rate of $4 500:US$1, probably bringing to an end the huge fluctuations
that saw the local currency losing value rapidly until the end of the third week of
June, and then a week later start a rapid climb in value to this week.
But this week saw stability. The Tuesday auction produced a weighted average of $4 505,4232 with the top bid of $4 580 and the lowest accepted bid being $4 480. But 10 of the 16 banks bidding put in bids that were regarded as too low.
Yesterday’s auction was by many criteria the creation of a stable rate. The weighted average rose slightly, by 0,26 percent, to $ 4 517,1359, this was a result of a determination by the 14
bidding banks not to go too low. The top bid remained at the Tuesday peak of $4 580. The bottom bid came in at $4 500, and all 14 banks were allotted what they wanted. The weighted average suggests a lot of bids were at $4 500 or very little above it.
While this was a rise in the price of a US dollar, it was a tiny movement. More importantly was that the 14 bids were in an Z$80 range, and this could have been even less if the top bidder had been a bit more thoughtful. That $80 was the lowest gap between banks seen since the auctions started.
The Tuesday gap of $100 was the second lowest, and again showed a narrow range, but that was partially achieved by the rejection of the bottom 10 of the 16 bids for being too low.
Presumably banks will now be thinking very carefully indeed and seeing on the Tuesday auction next week just how close they can get. But we can expect a very narrow range of bids. The next goal or target is to maintain this level of stability. There will be continual small changes in a world of no fixed exchange rates, and trends will emerge of gradual increases or decreases in the value of a currency, but not the sort of swings we have seen recently as an overvalued local currency lost a lot of value and then regained part of that value equally dramatically.
The recent gain in value was largely because the Ministry of Finance and Economic Development ensured that the pool of foreign currency on sale at the wholesale auctions for bankers was significantly in excess of what banks could afford to buy. That is there was more foreign currency on sale than the bankers could mobilise in local currency at the rates seen at the bottom of the Zimbabwe dollar decline, so US dollars became cheaper.
This followed the welding shut of the taps that were creating new Zimbabwe dollars at a far too rapid rate. That was, and always has been, the problem in Zimbabwe of the supply of local currency not being as tightly controlled as is necessary for a stable currency, or one that only loses or gains in value at modest rates.
We thought that much of the hard slog had been done in 2018 when Zimbabwe moved into proper budgeting and the Government stopped borrowing, except for a small part of the capital budget and even then only for income producing capital work when there was a tied source of income that would guarantee the liquidation of the debt. In other words, the Government stopped printing money.
But the Government is not the only source of local currency creation. The private banking sector can do this through expanding its loan book, and there was some dramatic expansion there. At the moment new loans are few and far between because of the very high interest rates, so loan books are probably decreasing in size as old loans are paid off.
The other main source appeared to arise from the compulsory purchase of the 25 percent of export earnings. If everything was perfectly stable, then the local currency used to buy that 25
percent would be currency raised at the auction where the currency was sold. This was not the case. The rapid expansion in the mining sector meant exports were rising, and exchange rates were slipping so an ever increasing amount of local currency was needed to buy the 25 percent. The Reserve Bank of Zimbabwe would, in effect, be creating new money.
Switching the purchases of 25 percent of export earnings to the Ministry of Finance and Economic Development stopped that. The Ministry cannot create or destroy money. It had to use the local currency account in the Consolidated Revenue Fund, where taxes are dumped, to buy the foreign currency and then move that into the foreign currency account in the fund. When the US dollars were sold the resulting local currency went into the other account.
So the currency trading had zero effect on the total balance. There had been suggestions that the large payments made in local currency by the Ministry were a factor, and there were some Government contractors who then converted the payments into foreign currency on the black market. But this would not create new local currency, just move around what was already in existence. It might affect black market rates, but not the fundamentals.
In any case the Ministry appears to have moved to a position where it spreads its payments. The biggest single payment is when it handles the salary bill, but that is moved into the accounts of hundreds of thousands of civil servants and security personnel, so should have minimal effects on liquidity.
But for the time being it would seem sensible to be very careful indeed of any increase in local currency money supply, and when this is required, such as to cover the need for liquidity when the economy grows, it must be very precise. We do not need any accidents again.
Calculations are being done in both the Ministry and the Reserve Bank to see where the “real value” of the Zimbabwe dollar lies. Different formulae are used but it seems that they are starting to give the same result. This is common in all countries, although usually authorities adjust according the inflation rate, working out how to minimise money supply when inflation rises and allow more liquidity as it falls below the target.
At the moment the Zimbabwe rates are not much help. The annual rate will be largely useless and a management tool until the rapid rises in monthly inflation in the second quarter of this year have fallen off the chart, along for that matter with the large negative monthly rates we are starting to see in the third quarter.
The main danger to be averted in Zimbabwe now is a return to that pattern of seven months of stability followed by a swift climb in monthly inflation and then a swift fall, all this being driven by exchange rates. We do not need any more of these peaks.
The changes made over the last few years have all tended to move the market into the central position, with the latest changes making the market king. The present fall in the price of a US dollar was market driven. But even then there had to be action by the authorities. Because the main cause was having a larger pool of foreign currency available than banks could afford to buy, there was a danger if every order was met regardless of the price offered that a bank could grossly underbid and offer a very low price for a US dollar.
This was blocked by cutting off the bids considered too low, or way outside the range that the main bids were creating, in six of the 10 auctions that saw the price of a US dollar fall. Banks now seem to have seen the point and yesterday’s auction culminated in all 14 bidders getting their full order but with a tiny range of just 1,2 percent between top and bottom bids. That is a lot less than the margin of 10 percent of so that banks charge between what they pay for foreign currency and what they sell it for.
Once stability is confirmed we can probably expect more exporters to feel safe in selling off some of their retained earnings to their banks, but we suspect banks might well have to operate within a much narrower range between their bid and ask rates. The authorities might well need to look at the rule forcing banks to sell any currency they buy very promptly.
While we do not need large speculative holdings in the banking sector, there might well be arguments in favour of allowing banks to buy a block of currency when one of the exporter customers needs some local currency and use this to start satisfying importer customers, but being able to spread that process
