The movements in exchange rates, both at the Reserve Bank of Zimbabwe foreign exchange auctions and on the black market, are making life more difficult for most businesses as they try and forecast the future.
The official auction rate slipped a little over 10 percent during this month, largely over the last three weeks as the Reserve Bank of Zimbabwe imposed higher allocation cut-offs that encouraged bidders to increase their bids and that double pressure pushed up the weighted average. Most bidders did manage to get their allocations, but in two of the four October auctions something close to a quarter wanting a bargain failed.
In the second auction we saw the first rise in allocation cut-offs for many months, when it was pushed up from the long-standing $85 to $88,50, which caught a fair number on the hop. The third auction saw that minimum allocated bid pushed up to $90, but only a handful of bidders were caught short, with the minimum bids by successful bidders tending to estimate that the auction would follow the previous two weeks where bidding at the previous week’s weighted average worked.
This week, the fourth October auction, a fair number must have followed the same policy, with a few trying to keep at the minimum allotted bid in the previous week, and again a fair number were short as the new cut-off was at $95, rather than the expected $93 or even $90. From the totals for the accepted bids, that is bids that had all the correct paperwork, and the totals for the allotted bids, it seems that most of those bidding low were the smaller bidders on both auctions.
The percentage gaps between accepted and allotted bids were smaller than the percentage gaps between accepted bids and allotted bids, tending to suggest the serious larger bidders were not taking any chances.
The problem now facing bidders on Monday is what instructions to give their bankers. The Reserve Bank has been absolutely silent on what it is doing and why it is doing this, although speculation abounds.
One school of thought is working on the basis that the Reserve Bank is moving towards a purer auction system, whereby the amount on offer actually exists and is fixed in advance and bids are allocated from the highest down until that amount is used up.
The problem with that model is that almost all bidders are imported essential goods. The priority lists exclude all the luxuries and optional goods and services, things we can live without, so those entering the auctions are seeking to pay for the stuff that we really do need if the economy keeps turning and even, when we look at medical imports, we are to stay alive.
But the changes will at least exclude some who have adequate stocks and were just looking at bargains for forward planning, or even in a sense playing the market by converting their holdings in local currency into stuff they could keep in a warehouse for use in six months or resell to someone less fortunate.
So there is some support for this model.
The second group is working on the basis that the Reserve Bank reckons after very small changes in exchange rates for most of this year, even with monthly inflation averaging close to 4 percent, the US dollar has become undervalued.
This probably has, because of the priority lists, more basis in fact. When the auction rate settled down and stabilised in August last year after several weeks of everyone trying to find the market level, many thought the exchange rate overvalued the US dollar. They were probably correct, especially as the Reserve Bank then adopted a policy of basically allocating to all accepted bidders, but maintaining a minimum cut-off point to tell the market that there were no bargains.
There was an adjustment in that cut-off point in January, in just one auction, but then the policy continued of full allocation of all accepted bids. That gave rise to the growing problem of the gap between allocation and the actual transfer of funds. Part of that gap arose from the oddities in export inflows, with tobacco money tending to come in a larger chunk from the middle of the year, and that is something that all agriculture export countries have to deal with.
In the absence of clearer signals from the Reserve Bank, which so far is only signalling that it expected the local currency to weaken significantly in October, there is probably truth in both models and that the changes are not down to a single cause.
One factor that has to be considered is the need to accept fundamentals. While Zimbabwe’s current account is positive, that is inflows of foreign currency exceed outflows, and even in the trade account where exports and imports are almost in line, the distortions of the export retention schemes play a major factor.
The auctions are largely funded from the 40 percent of export earnings that have to be liquidated on arrival. This is because exporters are not allowed to enter the auctions until they have used up all their retained earnings. This is not as bad as it sounds, since the net exporters fund their own imports leaving the auctions to fund essential imports from those who cannot export or cannot export enough. In fact statistics show that more foreign currency payments are made from these retained export earnings than are made from the auction allotments.
Additional relief was provided by the acceptance that consumers could use US dollars to pay for local goods, at the auction rate although cheating was widespread, which assisted local suppliers in that they had to use that money first before topping up at the auctions. The speculation in the black market largely killed that source, as people change first on the illegal market rather than spend the foreign currency.
There was also a modest interbank market, that is net exporters wanting more local currency to pay bills would sell through their banks, rather than chance the auctions, since they were guaranteed a known exchange rate and an instant market. But the interbank market was a lot smaller than the auction market.
However, it has become obvious that there is not a perfect balance between supply and demand at the auctions and interbank markets. The reason is not hard to identify. The US dollar is seen as a source of holding value, as well as a trading currency, and that US$1,8 billion at last count held in nostro accounts has created the distortion.
A chunk of that cash is working capital, money that the holders plan to spend on sourcing stuff for their businesses. But a larger chunk is profits being stored at zero interest in the sophisticated tin trunk provided by a bank. This is why there was pressure on banks to see how they could use that accumulation of non-working deposits in normal banking operations. Banks have not responded.
The real solution appears to be on eliminating that distortion of a modest but significant percentage of export earnings just stored, forever. No one has really done the sums in the outside world, although someone in the Reserve Bank or the Ministry of Finance and Economic Development must be gazing at spreadsheets, at what percentage of export earnings must go to the interbank market or the auctions for essential imports to be paid for.
Fixing the auction rate so that it reflects proper value is obviously a starting point, since it would be wrong to cheat exporters. Any changes in systems or practice have to be fair. But once a fair rate is established, and is then adjusted to reflect the small monthly changes in the cost of living and so value, other options open.
A crude system would be to increase the percentage of export or foreign currency earnings that have to be liquidated on arrival. Since many exporters do use all their retained earnings and quite a few have to top up, this would probably cause more problems than it solves, at least for a couple of years. One size does not fit all.
But the growing stash of foreign exchange in private accounts suggests that another solution is possible. The Reserve Bank initially had a policy of use it or sell it. Various limits were suggested, from foreign currency not used in one month, which was clearly too short, to say three months before the earnings had to be liquidated.
This needs to be re-examined. It could be done very carefully, say fixing percentages of retained exports not spent in normal business after three months that had to be sold. In a pure system there would be no retained export earnings and all imports would come from the pool in the auction or interbank dealings, but if we are retain the distortion of export retention we need the double of ensuring that the official rate is fair value and that exporters, voluntarily or otherwise, pump more of their earnings into official markets.
The fundamentals show we have the foreign exchange. It is just the distribution that causes the problems. The moves now being made by the Reserve Bank appear to be setting a stage that opens the operations of the markets to whole new scenes. Let us hope that someone is doing the sums properly.