Forex auction market sustains distortions

THE much-hyped foreign currency (forex) auction market had its inaugural trades on Tuesday this week. The weighted average forex rate, which the RBZ is taking as the official exchange until next Tuesday, is ZW$57,2582 to US$1.

The Brett Chulu Column

The highest bid to buy forex was ZW$100 and the lowest bid was ZW$25,50. A total of US$11,4 million was bid. The amount allotted,
US$10,3 million, was less than the total bids. This synopsis gives an indication of the likely impact of the newly-introduced forex auction market on the economy, particularly, in terms of price stability (forex rates and inflation).

An exchange (forex) directive issued by the Reserve Bank of Zimbabwe (RBZ)’s Exchange Control department on June 22, a day before the auction market kicked off, indicates that the auction market is calculated by the central bank as a vital policy initiative towards achieving price stability.
There are five salient issues arising from the operation and operational context of the auction market.

First, it is apparent that the auction market is an exclusivist market solely convened to allocate forex to priority importers.
Priority importers are those on the priority import list published in the exchange control directive. There are two categories of priority importers, with category one envisaged to get 70% of the funds.

The auction market is exclusivist in two forms; it excludes those that are not classified as priority importers and it excludes those that want to bid but do not meet the US$50 000 minimum.

This exclusivist auction market has one glaring poser from a forex access point of view. Category one of the import priority, among others, lists college and university fees. What foreign college or university charges fees above US$50 000?

If ever such foreign tertiary institutions exist, it means only the elite of this country can afford these and can access that money from the auction market.
Given a likely situation where the auction rate will trail the grey market rate, it means that the elite will get cheap forex while the rest are consigned to alternative and relatively more expensive forex markets. The same questions apply to the other, category one so-called import priorities I picked.
What happens to those with loan repayments (foreign) of less than US$50 000? Who has a pension income that can even approach US$50 000?
Who pays foreign rentals in the US$50 000-plus range? Category two of the import priority lists, among the five priority areas, disinvestment proceeds and dividend remittances. What happens if the dividends to be remitted are less than US$50 000?

Second, if the volumes of trade from the inaugural exchanges are indicative of the quantum of forex to be traded, then the policy objective of the central bank to have a single forex reference rate will fail dismally. A mere US$10,3 million was traded on June 23.
With the auction operating once a week on Tuesdays, the amount of forex made available is a teaspoon in the Zambezi. The forex allotted, at this rate, is projected to be about 10% of the country’s import requirements.

It is virtually impossible for such a tiny auction market to be the market marker for forex rates. Basic logic should inform us that the markets where 90% of the import requirements are met, will out-compete the poorly funded forex allocation exclusivist club (read as auction market). In fact, the grey market largely dismissed the auction market as a non-event, competition wise — in fact —grey market rates spiked.

Third, the central bank warned that those entering the auction market with a speculative agenda, meaning, those who want to manipulate the rate will be banned.
What makes sense for me is the type of speculator who will want to drive the auction rate down by offering low bid rates for the purposes of creating a cheap forex channel from the auction to the roaring black market. On the inaugural auction, the lowest bid was 25,5 and the highest was 100. Of these two, who would be a candidate of speculation?

With some bids not satisfied, an upward pressure on the auction rate is imminent. We woke up to the Zimbabwe Energy Regulatory Authority (Zera) announcing price adjustments indexed to the inaugural auction rate, causing a massive hike in the fuel pump price (local currency). We expect inflation levels to spike; this militates against the price stabilisation agenda of the central bank.

Fuel price hikes are a tide that lifts all boats. We should be cautioned against taking the price hike as a necessary temporary shock correction of the fixed ZW$25:US$1 rate. Forex shortage evident in the thin trades in the auction suggests a likely series of price hikes. It is a double-edged sword.The expected auction rate will not pull down the black market – this will create a fertile ground for forex arbitrage.

Corruption and extractive networks will find ways of extracting significant forex quantities from the auction and profit from arbitrage.
Fourth, the directive for shops to display both forex and local currency prices to reflect the auction rate of the day brings about two issues. This act is a backdoor re-introduction of official-partial dollarisation. Tacitly, shops are allowed to receive payments in forex, as well as in local currency. We have two challenges arising from this.

First, our economy is about 70% informalised — the bulk of economic players will ignore the imposed auction rate and will use the grey market rate as its reference. Second, formal retailers excluded from the priority list will find ways to game the system in order to maintain the import purchasing parity indexed to the grey market. We should not be surprised if such retailers will simply hike local currency prices beyond the grey market and still display the required command auction rate.

Fifth, the sources of forex are largely commandeered from exporters.Stating that lines of credit mobilised by the central bank will be part of the sources of forex for the auction should be taken with a pinch of salt. It is not new — when the 1:1 absurdity was discarded, the central bank promised to take the fight to the grey market with a US$500 million war chest, purportedly sourced offshore. The central bank failed to make good the promise.

The main sources for the auction are evidently retentions from export proceeds and the liquidation of forex not utilised by exporters. Effectively, the auction market has one forex seller, the central bank. You will not find many willing sellers of forex on the auction.

The auction, based on the evidence before us, is a quasi-market — it is not a free market. It is practically old wine in new skins — a mutated form of the old forex allocation system under the ruse of a market allocating forex.

As has been the case before, the auction will have more willing buyers of cheap forex than willing selling sellers of forex. We expect the auction to face forex starvation in the near future as exporters smarting from broken promises on forex liquidation will bring in less forex. The big one is small scale gold miners who were promised 100% payment in forex. They will have to be given their payment first and then the remainder channelled to the auction.

It was a weak premise to define our monetary problem as a technical issue that can be addressed by a technical solution by way of an auction market.

It is not a true market at all — it is an exclusive club where a limited pot is shared. If anything, arbitrages and distortions in the economy will continue. Our monetary challenge has structural roots that need genuine economic, political and moral reforms.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.

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