CZI urges RBZ to fine tune auction

The Confederation of Zimbabwe Industries (CZI) says the Reserve Bank of Zimbabwe (RBZ) should only sell foreign currency that it has already received to avoid creating backlogs from auctioning unrealised funds.

In its 2021 inflation and currency developments round up report, CZI also said there was urgent need to refine the central bank’s weekly auction system to make it a true price discovery mechanism.

Delays in settlement of allotted bids last year resulted in a cumulative backlog of about US$177 million on the auction, driving importers to the parallel market.

Analysts say huge premiums in prices of black market forex caused incipient inflationary pressures that drove prices to drift higher last year, although slower than in 2020.

“The authorities must auction only what is available on the day of the auction, have a minimum bid rate to accept informed by the previous auction and available bids and only pro rata the lowest bids if resources are still available.”

CZI also said there was the problem of the mismatch between supply and demand.
“The auction market ended the year demonstrating that it had failed to achieve efficient price discovery as the parallel market premium continued to widen, and to also attract holders of foreign currency to offload at the auction as it has depended on export receipts surrender and the 20 percent from local forex transactions as its main sources,” CZI said The industrial lobby made more recommendations to improve the efficiency of the auction, calling on the RBZ to indicate the amount of forex available at least 24 hours before the auction begins.

Such an arrangement, the manufacturing industry representative group said, would help manage importers’ expectations and ensure the central bank is not overpromising. CZI also said the arbitrage opportunities in the market were derailing the Government’s efforts towards achieving the national vision of transforming Zimbabwe into an upper middle economy by 2030.

“The demand for US dollars increased as most of the informal sectors are demanding
payment in US dollars.

“The inefficiencies of the auction market have also created arbitrage opportunities, which
are undermining the Government effort towards vision 2030,” CZI said.

The auction has been blighted by massive settlement delays; it took importers 8 to 9 weeks
to access foreign exchange after releasing their local currency accounts had already been
debited.

This increased traffic to the alternative sources of foreign currency, resulting in further
depreciation of the Zimbabwe dollar, hence inflationary pressures have kept growing.
The other impact of this was on the efficacy of the auction system as a price discovery
mechanism and this has driven forex pricing distortions across the markets.-The Herald