Forex auction helps stabilise prices

More than US$350 million has been allotted towards various import requirements since the Reserve Bank of Zimbabwe (RBZ) introduced the foreign exchange auction system on June 23 this year, helping to stabilise the exchange rate.

The auction market now meets virtually all the foreign currency needs of a cross section of registered businesses in the country that require the forex for key imports, mostly raw materials, equipment and machinery, services and consumables.

The Zimbabwe Economic Policy Analysis and Research Unit (Zeparu), which tracks developments in the global and domestic economies, in its latest Economic Barometer, Volume 22, said about US$274 million was allotted to importers from June 23 to October 6, 2020.

“Cumulatively to the auction held on October 6, 2020 a total of US$274,3 million has been allocated through the auction system, with about 3,4 percent of this having been allocated to the SMEs,” Zeparu said.

And since October 6, 2020 the RBZ has conducted three more forex auctions with cumulative allotments of US$85,7 million to take the combined total of awards since June 23, 2020 to about US$360 million.

Since the first auction was held on June 23, 2020, there has been a lot of developments and discussion issues, chiefly characterised by gradual market confidence in the system, such that by the October 6, 2020, there was already a noticeable gradual stabilisation of the rate.

The auction rate has stabilised since September 22, 2020 with the US dollar to Zimbabwe dollar rate now hovering around US$1:$81,3 and with it, stability in prices and drastic drop in monthly inflation.

Without a proper market exchange rate determination system, market prices were being indexed or referenced to a constantly changing black market rate, which resulted in rapid inflation increases.

Zimbabwe had the highest annual inflation rate in Africa at 761 percent in August 2020, a 24,5 percentage points decline from 785,6 percent recorded in May 2020.

The high inflation is largely explained by indexing of prices to the parallel market once runaway exchange rates before the introduction of the auction system in June this year. Measures introduced by the central bank such as the adoption of the foreign currency auction system and restrictions on the operations of mobile money platforms have started to reduce inflation.

Zeparu said the introduction of the foreign exchange auction system, held once on Tuesday every week, can be traced to the RBZ Monetary Policy Committee (MPC) meeting held on May, 22, 2020.

The MPC meeting resolved that a formal market-based system of foreign exchange trading must be immediately put in place.

In addition to ensuring transparency in foreign currency exchange, it was also envisaged that the electronic foreign exchange trading system would also be compulsorily used by the bureaux de change.

On June 17, 2020, the central bank gave the details regarding the operational modalities and guidelines for the auction system, while also indicating a date for the first auction as June 23, 2020.

Following widespread concerns on the exclusion of the SMEs from influencing the exchange rate developments due to a high minimum amount of US$50 000, a second foreign currency auctions for SMEs was also announced on the 4th of August 2020. The first auction for the small and medium size enterprises was held on August 6, 2020.

Zeparu noted that the sustainability of the forex auction system hinges on the ability of the RBZ to continue to take foreign currency from the exporters to feed the foreign exchange auction system.

As such, Zeparu said decentralisation of the auction system through gradual reduction of the central bank’s role as the seller at the auction is critical.

It is believed this would reduce arbitrage opportunities that can be enjoyed by active participants at both the parallel market and the auction system.

The continued huge premiums on the parallel market, Zepau said, demonstrated that the prices set by the participating firms at the auction may not be reflective of the actual supply and demand dynamics.

As such, the informal sector players only sell foreign currency to the parallel market due to higher returns at the parallel market while the use of dual pricing in a de-facto dollarisation environment makes buyers prefer to use the US dollar. — ebusinessweekly.co.zw