HomeOpinionPresidential intervention: Whither the exchange rate?

Presidential intervention: Whither the exchange rate?

Respect Gwenzi
ACCORDING to the Reserve Bank of Zimbabwe, a total of US$3,12 billion has been traded via the foreign currency auction market since its inception in 2019.

Between January and April 2022, a total of US$528,1 million was traded via the same market. Over the 12-month period to December 2021, the auction market traded a total of US$1,97 billion, implying that at the going rate in the current year, the auction market is likely to exchange a lower total sum by year end.

Allotments, however, tend to be higher in the second half of the year compared to the first, implying that value traded will pick up in the second half.

However, the evolving dynamics following an introduction of a new set of measures designed to restore economic stability through exchange rate management, reflect that the broader currency market is in for a major restructuring.

Going forward, the auction market will take more of a back seat behind the interbank market, in terms of both driving price discovery and pushing trade volumes.

It is also likely that the gap between the auction market rate and the interbank rate will narrow together with the gap between the two and the parallel market.

However, this does not imply that currency depreciation will overall slowdown. According to official data, the interbank market accounted for a total of US$309 million in forex trades over the 12-month period to December 2022.

The total represented 22% of the trades via the three different channels, including the auction market and the foreign currency account (FCA) direct payments.

Between January and April 2022, the interbank market facilitated trades amounting US$58,5 million or 41% of the total trades via the different forms of settlements.

The movement from 22% to 41% between 2021 and the first four months of the year represent a huge leap and the growing dominance of the respective market in trading of foreign currency on the local market.

Earlier in April 2022, the MPC recommended that willing buyers and willing sellers can transact via the interbank for amounts up to US$1 000, a limit that has now been revised to US$5 000.

Adoption of the resolution resulted in pick up in trades and creation of possible reference rate outside the auction market. The consequence of the move was a growth in the value of trades via the interbank and the emergence of a fairer exchange rate than the dominant auction market. These trends can help us define, what lies ahead for the different currency markets adopted by the country.

Emergence of the interbank market as the point market for price discovery is at first an admittance by authorities that the auction market was never a true representation of market forces.

For years, we have brought that to light highlighting that the auction market is used by the RBZ to suppress the exchange rate. This was achieved through managing the supply side of forex.

First the bank would go to the market and satisfy all lower bids, such that even if private players were to wait and supply at higher prices, the bigger chunk satisfied at lower rates will suffice to keep the weighted average exchange rate lower.

Now using the same achieved weighted average exchange rate, the RBZ will then demand a surrender of export proceeds, surrender portion from exporters at the respective weighted average exchange rate.

The cycle went on and on, but the RBZ was sure that it was only a game of time. The model was never sustainable given that the auction market itself lacked depth and was exclusionary.

A bigger chunk of economic agents in Zimbabwe playing in the informal sector do not have access to the auction market and rely on the parallel market.

What this meant was that the gap between the auction market and the parallel market was bound to widen over time and although in the past, stop gap measures were put in place, the gap would always re-emerge, this time to untenable level of over 100%.

The interbank rate, which is now primed to achieve the objective of price discovery, is different from the auction market in that it is not set by RBZ.

The RBZ has no role on the interbank market and only banks, who are authorised dealers are responsible for facilitating trades between buyers and sellers on the respective market.

Likewise, the interbank bank market unlike the auction market is rolling and does not have only a single day of trading per week, this helps in making the market more responses to economic dynamics which might call for currency rerating.

Since this market does not have RBZ, an interested member, players use actual demand to supply factors to drive the average rate and this rate should typically be closer to the parallel rate.

We anticipate that the auction rate will possibly stabilise at 20% below the parallel market.

Advantages of adopting the interbank rate are more and these include stimulating production and exports given that exporters surrender are ceded at a higher rate compared to the auction in the prior periods.

Further pricing of goods and services will tend to be more competitive and reflective of true market forces allowing for commerce to stabilise.

In as much as the interbank move is so rosy, it is the retention of the auction market in the matrix, which will create problems going forward.

The RBZ is electing not to disband the auction market, despite its admittance that the market has failed in price discovery, which goes to reflect on inefficiencies in allocation and possible market manipulation, such as, speculation.

What we will begin to see is the emergence of a three-tiered forex system in Zimbabwe. The first will be interbank market, highlighted above and controlled by banks.

The interbank market will only be dragged by lower volumes compared to the other two markets, given that government will elect to channel its surrender receipts to the former.

This means RBZ is now going to be subsidising imports for those that will be able to source funds via the auction market. The bank will pay a higher auction rate for surrender funds and offload same at lower auction rates and this is typical subsidy.

As in the past, we view this as unsustainable as it creates arbitrage. There is no mechanism to regulate the beneficiaries in terms of final product pricing and the cost will be felt by the taxpayer.

Gradually retention of the model will tend to disrupt the auction market over the mid-term.

  • Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net

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