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Eric Bloch Column

Mixed reactions surround forex auctions

e: JA”>LAST week witnessed the commencement of Zimbabwe’s foreign currency auctions, intended to bring some rationality to the country’s management of its very limited resource of critically needed foreign exchange.

By bringing the auction system into being, the Reserve Bank of Zimbabwe (RBZ) has sought to maximise the flow of foreign currency through official channels, as distinct from the long operative parallel and black markets. Concurrently, the expectation is that in the absence of a free float of the Zimbabwean dollar, the auctions will result in rates of exchange which determine the value of the country’s currency at real levels. Moreover, although constraints of an insufficiency of foreign currency will inevitably continue for the foreseeable future, the auctions are anticipated to ensure a greater availability for essential needs, instead of unofficial markets enabling diversion of the scarce commodity (hard currencies) to purposes unrelated to such essential needs.

But the first two auctions have evoked very mixed reactions. Importers have undoubtedly welcomed the fairly considerable decline in the cost of foreign currency from the parallel market rates that prevailed in December 2003. In mid-December, the parallel market was operating at rates approximating to US$1: $6 500, whilst the black market, mainly operational in the back-streets of Bulawayo, in proximity to Harare’s leading hotels, and in car parks and pathways of Victoria Falls, operated at rates reputedly about US$1: $5 500. By contrast, the weighted average rate at the first auction was US$1: $4 196,58, whilst at the second auction the weighted average rate was marginally lower, at US$1: Z$4 177,16.

Resultantly, some importers were ecstatic, having visions of funding future imports at about two-thirds of the cost of like imports only a month ago. At the same time, many exporters were cast into almost immediate panic, for they foresaw a sharp drop in export proceeds, resulting in an imminent collapse of their operations, bearing in mind especially the continuing impact of inflation upon their operating costs. And, whilst the exporters and the importers had such divergent reactions to the outcome of the first auctions, the Minister of Fiction, Fable and Myth, and his minions in the state-controlled audio, visual and print media immediately rhapsodised the alleged, instantaneous drop in prices of many goods, and eulogised the auctions as vehicles to the restoration of national wellbeing and the elimination of poverty.

That will not be so, for a temporary exchange rate drop, concurrently with rising operational costs, cannot bring about price reductions.

In practice, all these reactions to the first two auctions were ill-considered and misplaced. In the first instance, those auctions give very little indication as to probable future rates, for several reasons. At the end of the day, the over-riding criteria in determining the rates that will be bid for foreign currency, will be the relationship between supply and demand. If the amount of currency offered at the auction exceeds demand, bids will progressively, from auction to auction, decline. On the other hand, if the demand for the currency exceeds supply, bids will steadily increase, auction after auction, until they reach levels at which a willingness of many to bid diminishes, and ultimately disappears. When that occurs, the ratio between supply and demand progressively changes, eventually again impacting upon bid levels. And, as bids escalate the exchange rate upwards, until importers contract their operations due to an inability to maintain viability of operations, those higher rates provide enhanced operational viability and competitiveness to exports, enabling them to expand export operations. That results in an increased supply of foreign exchange, progressively resulting in lower bids at the auctions.

So, undoubtedly, there will be rate peaks and troughs as time goes by, as is the case in open money markets the world over although in most of those markets there is usually far less volatility in rate movements than in a contracted economy such as Zimbabwe. The Zimbabwean economy is subject to very radical movements at very short notice in response to its roller-coaster political and fiscal policies and usual disregard by the political hierarchy for fundamentals of good governance and economic well-being.

However, most reactions to the first two auctions, be they positive, negative or ambivalent, are premature, for those auctions could not, and should not, be benchmarks upon which to draw conclusions and formulate future business policies. That they are not authoritative indicators is due to several factors.

First of all, they commenced at a time when the economy is most inactive. The first auction was held on the same day as many factories reopened after their annual industrial recess, whilst many other factories only resumed operations this week, and others have yet to do so. Therefore, few — if any — industrialists will have been bidders at last week’s auctions. Moreover, bids could not be submitted unless and until approval of the Exchange Control Authorities had been received for the payments to be made with the currency to be sourced at the auctions.

Although the RBZ aspires to process applications for such approvals within 24 hours of receipt, the aggregate lead-time in obtaining approval is greater, including the administrative processing by the applicant, then processing by the relevant branch of the applicant’s bankers, who must in turn forward the application to the centralised Exchange Control division of that bank, which must lodge the application with the RBZ. After determination of the application, the approval has to traverse the same routing in reverse. Then an auction bid can be submitted, again traversing that potentially extended administration path.

With the first auction being only 12 days into the new year, there were not likely to be many who could have, or would have, done all the necessary to submit a bid. In addition, many were ill-disposed to bid at the first auction, they adopting a “wait and see” attitude, fearing that their bids at that stage could be markedly higher than necessary. They also had no idea as to the extent of foreign currency as would be offered at the auction, and therefore could not exercise a judgment as to the probable relationship thereof to demand, and hence an assessment as to the requisite bid level. That this was so was very clearly evidenced by the data of the first auction. US$5 million was on offer, but there were only seven bids, seeking a total of US$477 557,91 (ie only 9,55% of the currency on offer). The bid range was from $4 000 to $4 900 per US$1, yielding the weighted average auction rate of US$1: $4 196,58.

The second auction took place three days later, and potential bidders were aware that the amount on offer would be at least US$4 522 442, being the carry-over from the first auction, even if no further currency were to hand for auction. At a time when very clearly demand would be relatively low, with the near inactivity of industry and retail trade in post-Xmas doldrums, exacerbated by lesser than expected year-end sales and, therefore, overstocked positions, there was every motivation to bid low, and many did. In a matter of three days, between the first and second auctions, the range of bids widened significantly. At the first auction, the lowest bid was US$1: $4 000, and the highest was US$1: $4 900. When the second auction was held, the highest bid was only $100 greater, at to US$1: $5 000, whilst the lowest bid fell from $4 000 to $3 500. However, it was significant that the weighted average bid rate fell by a mere $19,42 to $4 177,16 only.

It is also significant that, although the economic activity remained in the usual start-of-year lethargy, nevertheless the number of bids rose from seven in the first auction to 50 in the second. Undoubtedly, that was because some who were not administratively ready to bid at the first, were ready to do so at the second, but it was very probably also because some felt that the results of the first auction provided them with some indications or guidelines enabling them to decide on their bid level.

Of course, if the rate does not rise to some significant degree, many mines, horticultural enterprises, and industries will be unable to export without sustaining massive losses, and most tourism ventures (already embattled) will confront immense operational difficulties and their survival will be at risk.

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