eBusiness Weekly
Debate is now increasing on whether the auction system for selling part of the Government’s share of the 30 percent of export earnings, the share that the exporters are compelled to sell to the Government, is still necessary and still useful.
There have been no auctions now since December 12, more than five weeks ago, and the exchange rate since then has been set by the commercial banks through their interbank rate, the weighted average of the prices these banks pay when they buy foreign currency and charge when they sell it.
There have been at times quite large variations between the prices set by each bank and even in a near perfect system there will be differences, hence the need for a weighted average when the daily official exchange rate is published. When the auctions are being run the weighted average of the successful bids on the auction forms the interbank rate the following day.
While the retail auctions remained, funds allocated were low and bids were few since only seriously large importers could enter that auction. The main activity was rerouted to the wholesale auctions for the commercial banks who would bid for the block of currency the Ministry of Finance, Economic Development and Investment Promotion put on sale each week.
The meant that the auctions acted as a corrective factor in the price discovery process. Banks were expected to be buying ever more of their needs, what they would sell to the net importers, from the net exporters, but the fairly large block of US dollars that appeared each week ensured that reasonable supplies were available.
The tightening of supply of foreign currency almost certainly caused last week’s sudden effective devaluation of the Zimbabwean dollar by a little over 25 percent, when the interbank rate dropped fairly dramatically from $6 443,2 on Friday January 5 to $8 331,6 on Friday January 12, with almost all of that drop in the first three days of the week.
It is fairly obvious that the commercial banks must have acted with some co-ordination, if not collusion, for such a big step to have taken place in near lockstep unison, which suggests there was a blurring of the free-market theory of price discovery through each bank’s daily trading. But without the auction, where the big sometimes differences between each bank’s trading position become obvious, there does not seem to have been many options left.
Figures for December show almost all the spending in foreign currency was using cash from foreign currency accounts, the private sector, rather than the money pumped in through the auctions from the Government share. This would suggest there was some easing of previous log jams of getting net exporters to sell some of their holdings to net importers, as well as the large quantity of business done by the net-earners of foreign currency who have their own funds.
But most net importers now have at least part of their foreign currency requirements in their own FCAs as a result of doing business with some of their customers in Zimbabwe in foreign currency, and even the pure cash receipts of foreign currency have to be banked by law, even if only the formal sector follows that law.
So there would have been quite a reasonable percentage of the imports paid out of FCAs coming from the accounts of what would be normally counted as net importers, except that they have a growing fraction of the money passing over their tills in the form of foreign currency. This blurs what used to be a rigid line between the net exporter and the importer.
The banker-led devaluation last week can be considered the price adjustment they needed to persuade some of their net exporters, or these days net earners of foreign currency, to sell some of those US dollars. The holders would have wanted a price a bit closer to the black-market rate than they were getting.
The black-market deals in a different pool of money from the bankers. Most of the foreign currency coming in are the free funds generated by remittances from the diaspora and are bought by a wide range of people, from those wanting to buy fuel, to those wanting to stash away value, to those who actually want to import something and cannot get much joy from a banker.
The banking system is simpler. Most of the foreign currency coming in would be export earnings and almost everything bought is for paying for approved imports. Neither the bankers nor their customers, except the net exporters, are allowed to build up large holdings in foreign currency. But still there is some psychological link between the two markets, and most sellers of foreign currency do not want a large premium on the black market.
Having gone for five weeks and a few days now without a wholesale auction, the question can legitimately arise as to whether this can continue, with the possibility that the black market will provide more price discovery, perhaps with the curious suggestion by the Confederation of Zimbabwe Industries, that the premium should be limited to 20 percent.
But perhaps the formal banking market has become more sophisticated and the trading desks within banks are now a lot more skilled and are able to move around a market. For the working life of all bankers now, foreign currency trading was not complex.
The exchange rate came from the authorities, and we saw some of the skills problems last year when for the first time in their working lives they actually had to think about the prices they were offering and the prices they would be selling foreign currency. A fixed modest profit was no longer guaranteed and a bank could now even lose money on foreign exchange trading, as some did when they gross overbid for some of the first tranches of Government money on the wholesale auctions.
There are several problems that could face some banks if Zimbabwe moved to a pure interbank system. A lot of the incoming foreign currency is earned by a small group of major exporters, mainly the major mining companies with some of the major tobacco merchants.
Some banks are doing rather well with their client base, and will be the choice of these major exporters when they need to sell some foreign currency. Other banks just have net importers on their books, and no golden goose generating the foreign currency that they need to buy. This was where the Government sales in the auctions were so useful.
If the auctions are now discontinued then in the debate now swirling there are suggestions that the banks with the major exporter customers will need to sell off to other banks a fixed percentage of what they are able to buy, a curious market distortion but one that will support a far more competitive banking market.
Other systems could be thought up, basically to stop Zimbabwe sinking to around half a dozen banks that buy and sell and foreign currency, and the rest just offering purely internal services of bank accounts, transfers and loans. The problem would be that the major importers would follow the major exporters, and so those half dozen banks would have the largest corporate customers. The little banks would have the little customers.
At the same time, if the banks are to run the market from now on, then the Government needs to retreat from its 30 percent as that is too large a block of cash to be kept out of the market. The Government does have its own currency requirements, and since the Finance Ministry is now responsible for servicing the foreign debt that can be substantial. So it must keep some percentage, but not as high as 30 percent.
There would also be need to ensure that the price-discovery process was open and transparent. That was the major advantage of the auctions, that it was impossible to cheat or let wishful thinking intervene. But the auctions themselves showed that there could be major differences between the banks, between the top and bottom accepted bids and there were even auctions where some bidders had to be excluded for bidding too low.
So far neither the Finance Ministry nor the Reserve Bank has made any announcement over the resumption of wholesale auctions, and both might well be interested to see how the commercial banks handle the markets without the auctions and then only intervene if they see the wheels coming off.
