eBusiness Weekly
For the first time since the beginning of November the Reserve Bank of Zimbabwe on this week’s auction rejected bids considered too low.
While it was only three bids, all on the main auction where 437 were allotted, these three totalled almost US$1,5 million, in other words they must have been at or close to the maximum US$500 000 on that auction. The bidders were offering between $108 to something still under $112,82, which happened to be the average rate two weeks earlier.
The auction, as explained before, is not a perfect auction since not all foreign currency goes through the auctions or is sold on the interbank market at the auction rate. In a perfect system this is what would happen, and the percentages sold on auction or the interbank could be anything. In fact, since the interbank rate would be a single bank-sell rate, with probably some negotiation over just what the bank paid the owner of the currency, most would probably prefer to work within the banking system with the auction just setting the price.
But around 60 percent of export earnings are retained by exporters, with only a modest fraction sold through a bank, and the auctions use the other 40 percent but limit bidders to those with firm import orders for the items on the two priority lists.
So we in fact have three foreign currency systems: the stuff the exporters keep, use and sometimes hoard; the auctions which includes the small percentage sold through the banks and what the Government uses; and the black market which has its own sources and buyers and sometimes includes in effect some of the retained export earnings when an exporter sets up a middleman business, importing for third parties but charging a selling price based on the black market, if they can get away with it.
This creates problems for the Reserve Bank, remembering that all the auction bids are for items that Zimbabwe actually needs and which the bidders must buy. The top bids are self-regulating. No on likes to pay more than they have to for their foreign currency. There are some desperate bidders who put in bids more than 20 percent above the previous auction rate, although this seems grossly excessive and no doubt a financial manager doing this has a chat with the directors.
The bottom acceptable bid is the problem. If we had a perfect auction system we could just say there was US$120 million this week, and it would be about this much once everything was thrown in, and mark off the bids from the top until the US$120 million was all sold. Some would, admittedly, go on vintage scotch whisky and some would go on critical raw materials and machinery.
But with the system now in place, where the auction imports have to be bought, the Reserve Bank has to combat bargain hunters, who might think they can buy essential foods at 1-1 say, and has to signal its own estimates of where it wants the auction rate to go. It can only do this buy chopping off the bids below a certain level.
For the first nine months of last year the Reserve Bank and the market were dealing with an almost steady rate, and the unwritten agreement was that if bids were close to that almost stable rate, or at least last week’s auction rate, they would be allotted. And we all know where that led once what was seen as too high a rate based on market fundamentals had reached what was seen as correct rate and then inflation continued.
So in October the Reserve Bank appeared to make a decision that exchange rates should be roughly inflation neutral, neither contributing to the monthly inflation but at the same time not being used as a primary weapon to fight inflation. Inflation fighting would move into the more traditional aspects of monetary policy, such as money supply.
Okay. The Reserve Bank, which always knew there was some cheating, then found there was more than it calculated and had to generally tighten up. One problem was that speculation, basically a complex arbitrage between legal and illegal rates, was creating within the private sector and within the banks more money than had been calculated, hence the switch to M3 when measuring money supply, something considered a bit old fashioned. But when you think about it, M3 was used when you had the sort of conditions we have in Zimbabwe, with heavy barriers on capital movements out of the country and a sort of priority system. So the switch is at least logical and rational.
Applied economics is a bit like defensive driving. We all know what is supposed to happen but we have to take into account the other lunatics on the road.
But the basic solution in October, with the new “flexibility” to use the term chosen by the World Bank, was to talk up the exchange rate. This saw four consecutive weeks of the Reserve Bank not allocating the bottom bids, and in two of those weeks there were a lot of rejected bids. But when you look at the very modest details given in the weekly reports it was easy to see they were just dumping a very narrow range of bids just above the previous week’s acceptable minimum.
The only real tool the Reserve Bank has when guiding bottom bids is to send a signal, and importers were able to read this after four weeks.
This tended to suggest that the main pressure was not so much a shortage of auction currency, but a determination to deal with over-enthusiastic bargain hunters. We saw the same this week, the amount of currency not sold to a valid bidder being just over 4 percent of what was sold, so the savings were small but three serious bargain hunters were told to think again.
Since the end of September the exchange rate has moved 33,06 percent over the 19 weeks, although there were no auctions in five of those weeks. Calculating backwards using compound interest formulas we find this averages, over the full 19 weeks, just over 1,5 percent a week, to be precise almost exactly 1,515 percent, and since monthly inflation was wandering around at about 7 percent we have a remarkable match between exchange rate movement and inflation.
That cannot be a coincidence, and supports the view that the Reserve Bank is using its influence to keep the exchange rate inflation neutral, which possibly gives bidders an indication of what number they should give their bankers when setting a bid price.
This might see some more precise bidding. Huge jumps in the exchange rate are rare. In the 14 auctions since the end of September there are just two pairs of adjoining larger jumps, a 3.33 and 4.36 in October and 3.83 and 2.30 in the first two after the Christmas break. Both appear to be more catch up. The record 5.77 percent jump on November 16 followed a small 1.96 the previous week and was followed by a -0.03 and a plus 0.02 in the next two weeks, suggesting some averaging was going on.
Of course bidders are not just trying to second guess the Reserve Bank, but each other, since after all this is an auction, and the auction works well when it comes to top bids although bottom bids require more calculation. The auction also works by dividing bidders into groups, from those who must have currency as soon as possible right down to those who might need it next month, maybe.
But rather than listen to gossip at the golf club, which tends to be the sum of fears, or trying to make up for a silly over-high bid recently, finance managers need to think straight and examine, very carefully, economic figures. You can never catch up on an over-high bid; the money has gone as with all bad buys. And market gossip is not fact.
There is still need to follow the Reserve Bank rules, of course, as we still get too many bids deemed invalid, which with a five rule system seems to imply that some bidders continue to chance their arm.
If anyone wants conclusions, here are three: The Reserve Bank appears to be uninterested in matching official and black market rates, which is sensible considering that the black market rate includes a large speculative element; it appears to be wanting the auction rate to be close to inflation neutral, which appears to be sensible; and it hates rule breakers.
