Willing buyer will seller forex market to dissipate parallel market, Old Mutual
The Reserve Bank of Zimbabwe (RBZ) governor, Dr John Mushayavanhu, in his latest Monetary Policy Statement (MPS), said the country is abandoning its foreign currency auction system and implementing the willing buyer, willing seller approach.
“The auction system has been replaced by a refined interbank foreign exchange market under a willing-buyer-willing-seller (WBWS) trading arrangement. Following this development, a transparent price discovery mechanism is now in place in the interbank market.
“The bank will continue to provide trading liquidity to the market using the 25 percent surrender proceeds from exports,” Dr Mushayavanhu said.
Old Mutual Securities in their MPS policy review said: “This is an attempt by the Reserve Bank of Zimbabwe to dissipate parallel market activities and move foreign currency trading into formal banking channels with a more transparent pricing mechanism.”
Many analysts have argued that the active trading of currency in formal banking channels will only work if the banks have either a more attractive rate than the parallel market and or better supply than the parallel market.
“The effectiveness of a vibrant interbank foreign currency market and sustainability of the new ZiG will be largely determined by the ability of government to cut back on its deficit financed expenditure activities,” the securities firm said.
The policy stance is reminiscent of the foreign currency auction which failed as a result of government’s quasi-fiscal activities.
“Our hope is that the valuable lessons learnt in that period will be applied in ensuring that quasi-fiscal activities are not repeated, and the ZiG will be able to hold its value,” they added.
“The second pillar to the success of this policy is ensuring that the export industries’ operating environment is conducive for competitive commercial enterprise.”
Any market distortion over the interbank market rate could cause foreign currency supply constraint bottlenecks and the consequent unviability of the interbank foreign currency market. In that light the surrender and retention policies may have to be tweaked to match global best practices to avoid side marketing and under-invoicing.
The securities company added that; “We believe that the MPS policy measures are a step in the right direction and that both fiscal and monetary authorities should maintain a strategy of mopping up excess ZiG liquidity and boosting the productive capacity of all export-related industries as critical priority areas.”
The firm said companies that have strong financial positions and foreign currency generation are expected to perform admirably in the outlook.-ebusinessweekly
