HomeEditorial CommentForex auction system brings some sanity but...

Forex auction system brings some sanity but…

THE foreign currency auction system, which was launched by the Reserve Bank of Zimbabwe with the aim of improving the availability of foreign currency to businesses as well as stabilise the Zimbabwean dollar, marked its first year in existence this week.

The auction system has allocated more than US$1,1 billion to various  sectors of the economy for the procurement of  imports, that include fuel, raw materials, machinery and equipment.

It would be churlish not to recognise the benefits accrued by the auction, which began on June 23 last year.

Trading giants such as Delta, Masimba Construction, British American Tobacco (BAT) and Nampak have hailed the auction system, which they say has gone some way to alleviate forex shortages that have slowed their operations.

By the first quarter of last year, the domestic currency had surrendered substantial value against the United States dollar, plummeting to about US$1:ZW$165 on the parallel market, from US$1:ZW$2,50 when the Zimdollar was introduced in 2019

However, the introduction of the auction system helped to bring stability to the market in terms of pricing of goods and services as well as enabling businesses to plan ahead. The foreign currency auction has contributed to the reduction of inflation from a high of 837% in July last year to 162% in May.

The introduction of the second auction system for small and medium enterprises in August last year was also a welcome move.

Challenges, however, remain with the Dutch inspired Foreign Currency Auction.

The exchange rate has discouraged exporters from offloading excess forex onto the market as it  is markedly stronger than the parallel rates of between  ZW$120 and ZW$135 to the greenback.

The delay between the time a company wins the bid and the time the bid is settled, which is between six to nine weeks, has been a major drawback of the system and gives a lease of life to the parallel market. The backlog is estimated to be in excess of US$150 million.

Those in the formal market also realise profits through diverting the little available foreign currency to the parallel market, which is both lucrative and less cumbersome than the official market.

The stability that has been created by the foreign currency auction is threatened by the promulgation of Statutory Instrument 127 in May this year, which effectively bars and penalises the pricing of goods above the official auction rates.

The statutory instrument, business has warned, will result in increased prices, which will fuel inflation and create mayhem in the economy.

Ultimately the forex auction system is only sustainable if the government supports it by taking concrete steps towards reforms, particularly around policy consistency where policies are not changed at the whim of which side of the bed the government wakes up from.

Policy flip flops such as SI127 remain a major obstacle to the success of the foreign currency auction market and the sooner the government realises this, the better.

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