On the auction market this week, a total of US$11 million was traded, which is the lowest outturn since the consummation of a revamped market in June 2020. It is even lower than much of the period before June 2020, which was characterised by huge forex shortages in the market and galloping jumps on the parallel market.
Consequently, premiums were very high and industry performance plummeted in that respective period. In contrast, the sharp decline in auction flows in the current year is not associated with the backside ills of yesteryear. Premiums to the parallel market have narrowed, thanks to a re-rating auction rate and a stagnant parallel market. These manoeuvres where the parallel rate is stable while auction flows dip by over 70% shows that there has been some outside factors supporting the rate.
There are possibilities. The one which we have posited for over the last two months is that the wider use of the US dollar, promoted by legislation, has seen more companies earn forex enough to fund their import needs.
Data shows that for some non-exporting companies over 30% of sales are now in foreign currency. This essentially means that most companies have enough forex to suit their own forex needs either for purposes of production or payments of services.
If this is the case, then naturally demand would be diverted from the mainstream auction market to the decentralised corporations receiving forex as payment for sales.
Some companies are even opting to settle suppliers in constant currency to avoid overpaying where local currency is constantly in review. This is one side with supporting evidence, showing how the market has managed to stabilise despite the plunge in traded flows.
Another dynamic is that of diverted funds from the auction market to the purchase of gold for gold coins production. There is almost 1 000 gold coins minted and sold to date, and according to government, demand remains high especially from corporate bodies. To be able to satisfy demand government will have to keep on purchasing gold through USD receipts.
However the net effect is that companies will channel their local currency holdings into the gold coins and forgo speculative import purchases. This would consequently lower the Zimdollar exposure on balance sheets and give comfort of value preservation.
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These manoeuvres on either side, cancel out such that where demand would have outstripped supply on the auction market, it would be moderated through diverted purchases of gold coins. In our view, this scenario is reality but we do not believe that it has had the most effect in terms of drying up flows onto the auction market.
Another simple perspective of entrenching dollarisation is government’s resolve to pay some of its creditors in USD and these being some of the major market movers previously influencing the parallel rate. This simple scenario has the direct consequence of reducing auction demand and curtailing parallel market activities.
Our observation is that temporary stability has been achieved through a cocktail of fiscal and monetary measures introduced late in the first half but some of the prescribed policies have a net negative payoff while some, if mismanaged may cause a catastrophic fall of Zimdollar.
We are of the view that sustained stability is not yet achieved and it will take more robust and comprehensive fiscal reforms to achieve optimal stability. Primarily, government will have to quell its appetite for monetary injection which is basically motivated by over expenditure.
Redressing this anomaly entails increasing productivity by expanding the productive sector, reducing budgetary inefficiencies through reformation of parastatals that includes privatisation. These moves together with the unlocking of legacy debt will motivate external capital to draw in and stimulate growth such that currency stability is guaranteed.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — [email protected]