THE auction system, touted as a panacea for the country’s foreign currency shortage, could be counterproductive and instead fuel the parallel market. <
Analysts this week said the auction system works effectively when there is abundant foreign currency. In areas where there is a perennial shortage like in Zimbabwe the system would push up the black market rate and inflation, as there would be too many Zimbabwe dollars chasing too few US dollars.
The analysts said the forex black marketers were not likely to release their money into the formal economy for it to be auctioned.
In the past three years forex dealers have shunned the government-pegged exchange rate. The dealers have created a parallel market from which most exporters have been sourcing their forex. Currently the parallel market for the United States dollar is hovering around US$1:$6 000 compared to a government pegged rate of US$1:$824.
The analysts said government could start by ensuring the availability of forex before introducing the system which they said could lead to more chaos on the hard currency market.
“The auction system hinges directly on the availability of the forex. We can’t auction a product that is not available,” observed Tapiwa Mashakada, MDC Finance spokesman. “The system will not create more forex on the market. It will not create new supply. We need more exports before coming up with further strategies to mop up the insufficient forex.”
Mashakada said the government should create an enabling environment to lure foreign investment and repair relations with multilateral organisations to secure balance of payments support.
“The system has worked well in Zambia because they have the forex and there is an inflow of aid that is pouring into that country. In Zimbabwe it is likely to flop because there is nothing to auction,” said Mashakada.
Economic commentator Eric Bloch said the auctions would push up inflation caused by the soaring prices of foreign currency on the market.
“The paucity of foreign exchange, coupled with ever-increasing impacts of rising inflation will result in soaring prices in the foreign currency auctions with consequential further inflation,” said Bloch.
According to Bloch the government would in turn shift blame to “enemies of the state” when the auction system fails to boost forex reserves and availability on the market.
“When that occurs, government is certain to claim that the rise in prices is not indicative of a lowering value of the Zimbabwean currency, but is due to manipulation of the auctions by unspecified enemies of government, who will be accused of using the auctions to embarrass the government,” Bloch said.
“There will be no explanation how auctions regulated and managed by the Reserve Bank can be so manipulated.”
The newly-appointed central bank governor Gideon Gono envisaged the auction system to solve the forex shortage that has hit the country since the economic downturn intensified three years ago. Analysts however say Gono’s strategy could lead to a repeat of the 2003 budget.
In a desperate bid to curb the parallel market, Finance minister Herbert Murerwa closed all bureaux de change after accusing them of plundering the economy through shady deals on the forex market. The move instead led to a flourishing black market. Analysts said the auction system could further push the forex black market rate.
“There is a danger that in trying to kill the parallel market we will end up feeding it through the auctions,” said an analyst with a local asset management firm. “The Zimbabwe situation is different from the Zambian and Netherlands cases. Zambia and Netherlands auction their forex because it’s readily available. Zimbabwe has no forex. How can we auction a product whose availability is next to nil,” said the analyst.