The Reserve Bank of Zimbabwe is likely to keep the foreign currency auction system for much longer after central bank governor, Dr John Mangudya, described it as the most “transparent system” to sell foreign currency.
Market watchers are in agreement with Dr Mangudya saying the auction still needs to continue for a while longer to allow banks and corporates to adjust to a fully liberalised forex market.
The relevance and significance of the auction system has come under scrutiny following the huge drop in bidders and funds allotted.
On November 9, 2021 the auction received 732 bids on the main auction and 1 283 on the SMEs auction.
Funds allotted were as high as US$46,8 million on the same day, but all this has come down to 66 bids on the main auction and less than US$11 million being allotted this week.
The development prompted some analysts to call for the winding up of the auction system in favour of a fully liberalised interbank market.
The recent resolution by the RBZ’s Monetary Policy Committee to increase the maximum amount entities can purchase from banks for bona fide foreign payments under the willing-buyer willing-seller system from US$20 000 to US$100 000 per week, was seen by some as a signal that the auction is expected to fade into insignificance.
Economist and former RBZ monetary policy committee member, Eddie Cross, said the auction system “has very little influence today, but is still useful”.
Prior to the drop in forex allotments on the auction system, the platform had been fraught with challenges.
Until recently, its exchange rate had been at a huge discount to the parallel market rate causing distortions in the financial markets and for businesses.
The auction was characterised by an ever-present backlog with successful bids taking months to access allotted foreign currency.
The auction system also fell prey to traders who snapped up foreign currency through the auction system then sell it at inflated prices.
In an op-ed in The Sunday Mail in June last year, Deputy Finance and Economic Development Minister Clemence Chiduwa, said the auction system was subject to “rampant abuse”.
In June the Financial Intelligence Unit (FIU), said it had imposed sanctions on over 200 local businesses for manipulating the foreign currency exchange rate through illicit black market currency trading and abusing the official foreign exchange auction.
FIU director-general, Oliver Chiperesa, told The Sunday Mail that as a result of the FIU’s investigations, dozens of companies have been blacklisted from accessing the RBZ forex auction.
Despite the limitations of the auction system, and the significant drop in bids and forex allotments, Mangudya, still sees it as the most transparent platform for accessing foreign currency by industry.
Asked by Business Weekly whether the central bank should switch to selling foreign currency it gets through surrender requirements by exporters, Mangudya said: “The auction system is a more transparent system for making forex available to the market.”
The decision to continue with the auction was supported by Trigrams Investments analyst, Walter Mandeya, who said the auction system seems to have served the important role of transitioning the country from being fully dollarised to a situation now were we have a functional local currency, “albeit with some structural weaknesses still to be addressed”.
“On the back of these structural weaknesses it is our view that the auction still needs to continue for a while longer to allow banks and corporates to adjust to a fully liberalised forex market.
“While it appears as if the financial markets have all the intermediation tiers in place and ready to handle the responsibilities of operating a liberalised forex market, there are still clear shortcomings on how the various players interact and a smooth functional relationship between these players is required to avoid potential pitfalls of a chaotic transition from the auction system,” said Mandeya.
He added that one of the key cornerstones needed before the RBZ forex auction is set aside is transparency in the price discovery process by the financial system, which requires that all players declare their positions transparently, especially the forex reserves held by the RBZ, which help in giving the market confidence on the ability of the country to meet foreign obligations.
“We would be very concerned should the RBZ set aside the auction system without some process of educating the general public of the shift, but more importantly, without clear engagement with both business and the financial players around a table to harsh out how a liberalised forex market would operate and the safeguards in place to defend the agreed system from rogue players.”
SME Association of Zimbabwe executive director, Farai Mutambanengwe, seemed to agree with both Mandeya and Dr Mangudya.
“I think the Auction should be repurposed into a wholesale market for interbank forex trade, as well as transactions over US$100 000. Transactions below that amount should now be done on the WBWS which of course should be liberalised and decoupled from the Auction,” he said.
Mutambanengwe added that the Bureaus De Change should now be liberalised and allowed to interface both primarily with the banks, as well as participate on the repurposed wholesale market, “if their volumes permit”.
Meanwhile, Dr Mangudya said savings the apex bank is making from selling approximately half of what is available from surrender requirements will be used to build reserves.
“We are currently working on building reserves,” he said.
While earlier in the year, Finance and Economic Development Minister Mthuli Ncube, had said only US$25 million is available for sale every week, the figure could be much more given the growing exports and increased local sales in foreign currency.
In his MPC statement, Dr Mangudya revealed that foreign currency receipts stood at US$7.7 billion as at 31 August 2022, representing a 32.4 percent increase from US$5,8 billion recorded during the same period.
This means the surrender portion of approximately 40 percent of export proceeds has also increased.
Local US dollar sales where players surrender 20 percent to the RBZ are also increasing.
Cement producer, PPC, recently disclosed that 72 percent of its sales in the country are now in US dollars.
Many other businesses revealed that customers are preferring to settle their transactions in United States Dollars which will increase the surrendered portion to PPC.
MPC member Persistence Gwanyanya said as the monetary policy remains tight banks have to support their customers, especially those borrowed, with foreign currency.
“Some banks are prefunding auction allocations to create value for their customers and we expect this trend to continue at more banks.
“We expect a pick up in interbank trades. However, for now we want RBZ to prioritize clearing the backlog, which is expected to be cleared before month end,” Gwanyanya said.
He added that the traction on interbank will be supported by the recent increase in interbank sales limit from US$20 000 to US$100 000 per week.
“This encourages banks to be more aggressive in mobilizing foreign currency for onsell. Banks that create value for their customers will be the winners. The interbank has to be more efficient and effective. Bankers have to scale up the game.”