CZI favours WBWS over RBZ’s auction system

Empowering businesses to access foreign exchange through the banking sector will put the economy in position for strong growth this year, the Confederation of Zimbabwe Industries (CZI) has said.

Access to foreign currency remains critical, especially given that the Zimbabwe economy has high import dependence.

Last year alone, total officially recorded foreign exchange payments were valued at US$8,6 billion.

In its 2022 third-quarter Business and Economic Intelligence Report, the manufacturing sector’s representative body said Government’s top priority in 2023 should be to find a solution for formal access to foreign exchange through the banking sector.

This comes as measures to create an effective foreign exchange trading platform remained a challenge over the greater part of the first nine months of 2022 and remained a major concern till the end of the year.

The Reserve Bank of Zimbabwe’s Monetary Policy Committee (MPC) has since promised to further liberalise the foreign exchange market in the first quarter of this year.

In its last meeting held on December 2, 2022, the MPC promised: “to enhance efficiency in the operation of the foreign exchange auction system and the willing-buyer willing-seller foreign exchange mechanism.”

Formal access to forex through the banking sector, CZI said, can be achieved by “allowing the willing buyer willing seller market (WBWS) to develop into a properly market-determined rate.”

“For the government, this is a fairly low-risk move that will jump-start growth in tax collection, which has remained stagnant in US dollar terms,” said CZI.

The WBWS exchange rate is the official exchange rate as promulgated under Statutory Instrument 118A of 2022 and its exchange rate was meant to be market-determined, informed by demand and supply principles.

However, according to CZI, the WBWS market is yet to function as a truly market-determined exchange rate as there are a lot of restrictions in access while it only caters for a limited segment of the population that seeks external transactions.

Since its introduction on 12 April 2022, the interbank market platform has only managed to handle forex payments worth US$218,2 million.

This is compared to US$1,1 billion in payments made through the auction system and US$7,2 billion worth of payments made outside the two official platforms.

While the auction system returned this week, with the central bank allotting US$10,8 million but short of the day’s total requirement of $14 million, CZI believes an adequately fine-tuned WBWS platform is better placed to handle trading of foreign currency in the country.

The business lobby group claims that owners of the foreign currency (willing sellers) still played only a very limited role in setting the price “with too much interference from the RBZ”.

Thus, the official rate always lagged behind the parallel market rate, where demand for foreign currency also goes beyond the need for external transactions.

As of yesterday, the official exchange rate (WBWS) stood at $708.6502 per US$1 while the parallel market rate was being quoted between $950 and US$1,200 per greenback.

Economic analyst, Kuda Mugova, said although it will be ideal for banks to lead in the process of forex distribution, it might still not be the solution.

“The question one has to ask is will all the customers have equal chance of accessing the forex. We have taken long to liberalise the forex market meaning there are many challenges the formal market has to go through or fix to get to what CZI desires,” Mugova said.

Economist, Professor Gift Mugano, is also of the view that the WBWS will not be able to resolve access to forex challenges.

“When it comes to the issue of scarce foreign currency, there is a structural challenge. When we talk of a structural challenge, we are talking of supply side constraints in the sense that only a few banks — two or three the whole market control foreign currency.

“How then do you have the willing buyer-willing seller platform that is effective when the money (70 percent of forex) is being controlled by one bank?

“It tells you again that the participation of willing buyer-willing seller, even if Government doesn’t want to control it, it has already lost because there is one bank or two which have got dominance in terms of ownership of foreign currency.”

As such, Prof Mugano said the other banks now do not have enough muscle to participate on the market and thus resulting in a monopolistic system where the price is set by one player.

“If you are a monopoly, you determine the price and it therefore means the free-market system that we see at Mbare Musika when we go to buy tomatoes where we then have an efficient price discovery, will not happen also in the foreign exchange market in Zimbabwe because of the structural challenges which l have alluded to,” he said in an article published by Business Weekly last week.

However, Trigrams Investments economic analyst, Walter Mandeya, said financial intermediation by the formal banking system has to now be prioritised by all economic actors as a way to further stabilise the exchange rates and build on the successes of measures taken by the RBZ and Treasury to reign in runaway inflation.

“With the majority of banks having complied with the new stringent capital requirements, the RBZ needs to start delegating the allocation of forex back to the banking sector, whilst improving its own capacity to supervise the sector through enhanced technology.

“This will bring both efficiencies and innovation into the financial sector who are more than capable of sourcing and allocating forex if correctly incentivised,” said Mandeya.

He said: “As highlighted by the CZI, the business community has outgrown the Forex Auction system, which served to weed out rogue players from both the financial services sector and the business community.

“A new more efficient system, managed by the banks, with the strong oversight of the RBZ is now required to ensure that gains made are built upon if we are going to achieve middle-class status by 2030.”-ebusinessweekly