eBusiness Weekly
Michael Tome
FOREIGN currency bids at the Reserve Bank of Zimbabwe (RBZ) foreign currency auction system have declined significantly due to the liquidity crunch that gripped the market following intervention by Government to stabilise the local currency and rein in inflation, analysts say.
This contradicts claims by the central bank that bids on the weekly forex auction have plunged following the introduction of the willing buyer willing seller forex trading system, as volumes on this market remain negligibly thin.
The analysts say although welcome, the impact of the willing buyer willing seller system, administered by banks, was still insignificant such that firms being covered by the RBZ auction system continue to face challenges securing alternative sources of foreign currency.
In his mid-term monetary policy statement, RBZ governor Dr John Mangudya, claimed that the first half of 2022 saw a decline in average bids per auction to about 1 450 per week, which was lower than the average of 2 000 bids per week recorded in the fourth quarter of 2021.
Dr Mangudya attributed the decline in the volume of bids to the introduction of the willing-buyer willing-seller system forex trading framework.
However, official statistics show that from its inception in April 2022 to 28 July (roughly four months) cumulative volumes of foreign currency purchased by local banks under the willing buyer willing seller system stood at US$18, 7 million while sales totaled US$17,1 million.
But the forex sold on the auctions conducted on August 23 2022 stand at US$18,1 million, meaning that cumulative sales of foreign exchange through the willing buyer willing seller platform since its inception are almost equal to the weekly allotments on the RBZ auction.
The auction system, which was introduced in June 2020 to assist with market led determination of exchange rates, has disbursed more than US$3 billion since inception for procurement of key imports, including raw materials, machinery, equipment and fuel.
Following its introduction, annual inflation fell progressively from a post dollarisation high of 837,5 percent in June 2020 to a two year low of 50,1 percent in June last year while the Zimbabwe exchange rate stabilised during that period.
“The reduction in the number of bids is attributable to the introduction of the willing-buyer willing-seller foreign exchange trading mechanism with some applicants who used to rely on the foreign exchange auction system now accessing foreign currency through that system,” said Dr Mangudya.
The bank introduced the willing-buyer willing-seller foreign exchange market trading system in line with Government policy to move towards a more liberalised exchange rate as authorities seek to inspire confidence in the market.
However, rebuffing the RBZ’s claims, Zimbabwe National Chamber of Commerce (ZNCC) president, Mike Kamungeremu, attributed the decline in
bids to liquidity crunch in the market given the suspension of payments to contractors carrying out the public infrastructure projects as well as the impact from the introduction of gold coins.
“Many banks have been telling us that there is nothing on the willing buyer willing seller market. When we look at it from where we are, the number of bids have gone down because of the liquidity crunch, owing to the introduction of gold coins and that the government has stopped paying their contractors in RTGS.
“That has naturally lowered the amount of money in circulation, the auction itself has been mopping liquidity, but in terms of the willing buyer willing seller, banks that we have been in touch with keep telling us that there is no money,” said Kamungeremu.
He said the US$17, 1 million that RBZ says has been sold through the willing buyer willing seller was too small a figure to cause a decline in demand for forex on the auction, since the auction on its own traded more than double that amount every week.
Economist Eddie Cross, weighed in saying the willing buyer willing seller platform was minute compared to the requirements of industry and businesses to oil their operations.
“Money circulating on the willing buyer willing seller platform is totally inadequate – it really plays a little or no role in meeting the needs of the majority of manufacturers and importers, very small amounts are happening on the interbank market which makes little or no contribution to the vast transactions,” said Cross.
Commenting on the same Confederation of Zimbabwe Industries (CZI) president, Kurai Matsheza, highlighted that the decline in the number of auction bids on the auction was a result of a cocktail of measures put in place by the authorities.
“Of course, the willing buyer willing seller does (explain) somewhat… the decline in bids but the other factor is the unavailability of Zimbabwe dollars lately, some companies do not have the RTGS to go to the auction at the level they used to do.
“Government suspended some payments to its service providers, which is all welcome, gold coins have also mopped up some liquidity out of the market so the liquidity in the market is quite tight,” said Matsheza.
Small to Medium Enterprises Association of Zimbabwe (SMEAZ) chief executive officer, Farai Mutambanengwe, said the delays in settling of bids at the auction had led to reduced interest in the auction platform by some businesses.
The percentage of SMEs participating in the auction has actually grown, but the actual figures being allocated on the auction have come down, the auction is no longer very functional, and fewer people are now trying to use the auction because it is not settling in time, “said Mutambanengwe.
