LOWER bids on the Reserve Bank of Zimbabwe (RBZ)’s foreign currency auction system could bear the brunt of the limited amount of hard currency as the money will be offered to bigger bids.
Monetary Policy Committee member Eddie Cross said the foreign currency auction system was overwhelmed, with bids outweighing availability of foreign exchange.
Cross forecasts the exchange rate weakening in the long term on account of an acute shortage of foreign currency.
This shows the extent to which the auction system is overburdened at a time resources are limited worsened by increased cases of smuggling of minerals and tax leakages.
The informal sector, which constitutes the bulk of economic activity, relies on cash transactions that are not taxed.
“I see the exchange rate depreciating to some extent. I think the open market rate at the moment is about ZW$100 to ZW$110: US$1 and the auction rate at ZW$ 81-82: US$1 is holding steady.
“The real problem is securing enough hard currency to put on the auction to meet demand. Indications at this stage are that we may have to cut off the lower end of bids,” he said.
Cross was speaking during the online Big Debate Series, Zimbabwe 2021 Economic Prospects, hosted by Alpha Media Holdings, on Wednesday.
Explaining his views in an interview yesterday, Cross said: “What it means is that, according to the Dutch auction system, if we have applications for US$35 million and we only have US$25 million; that means we will allocate the top bids of US$25 million and not the lower bids worth US$10 million.”
This comes as the Central Bank plans to print ZW$50 notes — a move market watchers say will stoke inflation, already hovering around 400%.
Cross’s remarks are in sharp contrast with RBZ chief John Mangudya’s October 2020 comments.
The Central Bank governor said mineral exports receipts amounted to US$2, 4 billion in the first nine months of 2020 or about half of total export receipts. Of the US$2,4 billion, US$800 million from the forex retention collections, was channelled towards the auction system.
This, Mangudya said at the time, was more than enough for the auction system which traded an average US$19, 8 million per week.
During the Big Debate Series, Cross said the auction platform has stabilised the exchange rate and the economy.
“When we floated the auction in June 2020, the black market headed for ZW$200: US$1 and many of my friends forecasted that we would be at ZW$200 by Christmas but that was not the case,” he said.
Cross, however, said he was concerned by the monthly inflation rate of 4% “which is very high”.
Contributing to the debate, economist and CEO Africa Round Table executive director Kipson Gundani said the auction system was manipulated.
Gundani said the exchange rate was a mirror of the real economy and the huge gap of about 50% between the official rate at ZW$82: US$1 and the parallel market rate at ZW$120: US$1 was an indication of glaring disparities.
“I am a proponent of the idea that the exchange rate should be left to find its own level. This whole idea of trying to manipulate the exchange rate will lead to explosion and somebody somewhere is bearing the brunt and these are our exporters,” Gundani said.
“We have seen a lot of distortions including the launch of domestic and foreign nostro and it appears the domestic nostro is a fake account because you can’t do much with it. I think as Zimbabwe we have suffered a long period of exchange rate manipulation and experimentation; prior to the period leading to 2009 there was a lot of exchange rate manipulation.”