Time to review the forex auction system, industry . . . as CZI calls for temporary suspension SI 127

Zimbabwe’s industrial players, a significant stakeholder in the foreign currency auction system, have said its time to take a step back and look at the auction system and see how it can be enhanced.

At least 70 percent of foreign currency on the Reserve Bank of Zimbabwe (RBZ)’s auction system are absorbed by industry.

This comes as the authorities last week promulgated Statutory Instrument 127 of 2021 that — among other things — empowers the apex bank to impose penalties on businesses and persons that actively break regulations in the Foreign Exchange Act (22:05) and the Banking and Use Promotion Act (24:24).

Some of these regulations relate to pricing goods and services only in forex in line with the prevailing multi-currency environment; issuing a local currency receipt for a foreign currency purchase, as well as use of foreign currency acquired through the central bank’s auction system.

Also, in terms of the new regulations, companies face a fine of up to $1 million (approximately US$11 800) or an amount equivalent to the value of the foreign currency obtained will be imposed for misuse of foreign currency obtained from the Reserve Bank of Zimbabwe’s foreign currency auction system.

And both businesses and individuals will also be liable for a penalty of $50 000 if they refuse to accept payment in local currency at the prevailing official exchange rate, or if they charge above the official rate.

Confederation of Zimbabwe Industries (CZI) chief executive Sekai Kuvarika said SI-127 should have been more focused on addressing the arbitrage issues on the auction system.

“The RBZ has the information about who is abusing foreign currency auction, and the extent of this abuse and in what form it comes, and they also have the instruments to deal with the particular delinquent companies.

“There is an arbitrage window due to policy (in)efficacy or policy implementation has created or allowed to widen, and that is the window that we should be addressing rather than beginning to create legislation for activities that are taking place in that window,” she said on Zimpapers Television Network (ZTN)’s Mint.

“We need to revisit the auction, look at the objectives that the auction was set up for, which was price discovery and access of foreign currency on the formal market, and we need to review the performance of the auction in that respect and then we eliminate that arbitrage window.

“There was a time when the auction began to fall back in terms of settling bids and it put pressure on some companies to then seek alternative sources of foreign currency to finance their requirements.”

There was an uproar after promulgation of the Statutory Instrument, with concerns that businesses will price upwards their US dollar prices in response to the requirement to price goods and services in line with the official rate.

But some observers say there is no basis for such a move for players that are accessing foreign currency on the central bank’s auction system.

A survey this week by this publication showed that the large retailers and other big corporates had not reviewed their prices upwards, although listed retailer OK Zimbabwe had last week moved to stop accepting US dollars as payments.

Much ado about SI-127….

Said economist and former Monetary Policy Committee (MPC) member Eddie Cross:

“About seven months ago the Reserve Bank approached the major retailers and said to them look you are getting foreign exchange at the auction rate, why don’t you use the auction rate as the means of converting your US dollar prices into RTGS and they all agreed to do so, I think the only chain that did not agree at the time was the Spar Group.

“And we have had seven months’ experience with the major retailers, and I saw the results of one of the major retailers the other day, it’s a public company, and I was actually very impressed. Sales per square meter had risen and it didn’t seem to have any effect on their bottom-line. So, I found the uproar to this SI rather amusing actually because in the majority of cases it will have little or no impact on the way in which they have been doing business. OK Group reacted hurriedly, and perhaps without looking at the SI by stopping sales in US dollars.”

At the end of last week, the RBZ announced that businesses had two weeks to become fully compliant with new foreign currency regulations

Cross, however, suggested that instead of using regulations, the authorities are better of leveraging market forces.

“It’s the use of coercive means to achieve these things that I don’t like, they are better advised to strengthening of the market and allowing the market to determine values, rather than trying to achieve the same goals using a blunt instrument,” he said.

Meanwhile CZI has called for temporary suspension of the SI.-ebusinessweekly.coz.w