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Forex auction: New headache for RBZ

By Kenneth Mareya

HAVING introduced the auction system to determine the country’s exchange rate in a bid to curtail market instability that was driven by skyrocketing parallel market exchange rates in June last year, the central bank faces another acid test.

One can argue that the auction system was a noble idea towards bringing market sanity, though it needed consistent review. The exchange rate has gone for about four months averaging at US1: ZW$85.

This is what captains of industry and commerce would like to see if the central bank manages its sustainability and realisticness.

One positive thing about the auction system is that industries have been managing to access cheap foreign currency to purchase critically needed raw materials, of which 43% has been directed towards raw materials.

According to the central bank governor John Panonetsa Mangudya in his mid- monetary policy review, a total of US$1,72 billion had been allotted as at July 27, 2021, representing 98% of total bids submitted to the auction.

Reflecting the importance of the SMEs sector, the share of allotments of the SME Auction to total allotments grew from 3,5% in the third quarter of 2020 to about 14% in the second quarter of 2021.

So if to date an amount which is less than US$2 billion had been allotted this shows that there is a huge gap of several billions that is being financed by own means.

Simple logic is that most businesses, which do not qualify or that fail to get USDs on the auction floor source the funds on the parallel market.

With an economy that is dominated by informal traders and SMEs of which the majority of them do not qualify for the auction system due to various reasons, the official rate is highly fictitious.

However, in the real world, the parallel market rate is now almost double the official rate and this is hurting the ordinary person in the street as the majority are earning in RTGS while the bulk of transactions are in USDs.

When the central bank introduced Statutory Instrument 127 of 2021 (SI 127) to enable the Bank to levy civil penalties against abusers of Foreign Exchange Auction System, it was crystal clear that the official rate did not reflect what was on the ground.

Initial statements from the RBZ seemed to threaten all violators of the official exchange rate without really checking on the source of funds.

This did not take long to manifest as the central bank through investigations by the Financial Intelligence Unit (FIU) and the Bank fined about 27 companies for failure to adhere to the rules of the auction system and flouting the exchange control rules and regulations.

The immediate result was a massive increase in prices by traders in both the USD and RTGS in order to align the prices with the parallel market rate.

The central bank swiftly responded by clarifying its intention to strictly focus on violators of the auction system though some traders who had adjusted their prices maintained their new prices which were quite high.

The new headache that the auction system is posing to the central bank governor is the growing mismatch between demand and supply of foreign currency.

The system is now in arrears of about US$200 million, meaning to say that the central bank has been allotting money that was not available.

The delays in allocating the money raise eyebrows and impact confidence in the system.

The challenges which are manifesting now are a clear sign of what many economists have been questioning on the transparency of the determination of the exchange rate since inception.

The odds are pointing to a managed exchange rate compared to the flexible one which the system is portrayed to be.

If, therefore, the country is using a managed exchange rate it requires the bank to hold some foreign currency reserves to back its currency whenever it depreciates beyond certain rates.

This however, is a tall order for the central bank as the market is no longer clearing.

The sharp increase in the parallel market rate in the past few weeks which is now hovering at around US1:ZW$160 is a sign that the auction system is now leaving a wider gap of demand in foreign currency, causing demand for the greenback to spike on the parallel market.

What has been the plan for the central bank?

In his monetary policy statement review, the governor had said: “US$150 million Letter of Credit (LC) facility with Afreximbank, which will see participating banks issue letters of credit to their qualifying clients to import essential raw materials and other inputs to support the current growth trajectory.

The LCs will go a long way in easing pressure on the Foreign Exchange Auction System as some of the critical imports will be financed under this arrangement.”

The governor admitted that there is pressure on the demand side of the USD though his strategy is facing its own challenges perhaps due to confidence issues from participating banks and companies.

Inflation is looming as the Zimdollar continues to tumble on the parallel market against the USD. Currently the inflation rate officially stands 56,4% as at July (last month). However, the depreciating Zimbabwean dollar and the increase in fuel prices has prompted many economists to anticipate a surge in prices in the next few weeks to come.

Though the governor believes otherwise, the reality is being noticed by consumers who are being hurt on a daily basis by changes in RTGS prices due to depreciating currency. A simple reality check for the governor is to find out the real worthiness of our largest currency denomination. The honour that was given to Mbuya Nehanda on our new ZW$50 note will sooner or later be forgotten as inflation may wipe off the value in not less than a year.

But what really needs to be done?  The central bank needs to be more realistic on its official exchange rate as this will allow more funds to be released to pass through the formal channels. Secondly, the central bank needs to revise downwards it’s retention for exporters to incentivise them.

The bank also needs to be more vigilant on gold leakages. Though the central bank would want to keep inflation down the pressure from the exchange rate will exert an upward pressure on prices prompting a rethink if the Zimbabwean dollar is the answer. Some economists would concur with me that the economy was not ready for the Zimbabwean dollar when it was introduced though the central bank implemented quite a number of policies both monetary and fiscal to contain money supply and induce fiscal discipline respectively.

  • Mareya is an economic analyst. This weekly column, New Horizon, is published in the Zimbabwe Independent and coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society and past president of the Institute of Chartered Secretaries and Administrators in Zimbabwe. — kadenge.zes@gmail.com or mobile: +263 772 382 852.

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