Forex auction current, but backlog yet to be cleared

THE Reserve Bank of Zimbabwe (RBZ) is now current in payment of all foreign currency allotments at the auction with a weekly average of US$25 million being availed for allotment, an official said yesterday.

RBZ is moving swiftly to close the foreign currency backlog, which at the moment ranges between US$150 million and US$160 million at the auction system.

Briefing delegates attending the Zimbabwe Economic Development Conference which ends today in Victoria Falls, a member of the Central Bank’s Monetary Policy Committee (MPC) Professor Ashok Chakravat said the backlog at the auction system was a result of an overestimation of the sum of money that was coming through surrender from the export sector.

“The problem with the backlog was, I think, and we admit this, we made an overestimation of the sum of money that was coming through retention through surrender from the export sector and that resulted in more allocations being made in the Tuesday auction than the available funds.

“Now that issue has been corrected and now the secretariat of the Reserve Bank has estimated that roughly speaking they are confident that there is US$25 million per week which is available.

“And we limit the amount to US$25 million, in fact, because of the depreciation of the rate and the non-availability of RTGS in the last few weeks, there has been more forex available from the auction than bidders,” he said.

In the last two weekly auctions, Prof Chakravat said the amount that was bid and allocated was in the region of US$20 million.

“In other words, there was saving that the Central Bank of about US$5 million per week . . . You will find that from auction 94 onwards, the Central Bank is current in terms of payment of all allotments,” he said.

“I think the delay is only about two weeks and if there is anyone who has not received their funding within two weeks, they are quite open and welcome to complain to the Central Bank to the governor (Dr John Mangudya) or the Exchange Control or even one of us who are in the committee and the matter will be dealt with.

“So, the backlog, just to give you the information was from auction 82 to auction 83 and roughly speaking the amount was about US$150 million to US$160 million is the backlog and the Central Bank has committed to clearing that backlog and that has already started.”

Prof Chakravat would not state when the backlog will be expunged, but gave assurance that the accumulation was being cleared going forward.

“The auction is current, in fact, it has got more money than the bids that are coming in,” he said.

The Government introduced the weekly forex auction platform in June 2020 to improve access to hard currency by businesses, which they require to import critical raw materials for production processes.

The auction system priorities the productive sectors and other key sectors of the economy that include fuel procurement, pharmaceuticals, grain imports and essentials like cooking oil.

Prof Chakravat said the items were not a priority list but it is a generalised kind of area that is permitted within the auction.

On auction pricing, he said: “There is some view that the auction price is fixed, it is actually not fixed and the committee cannot fix it.

“Basically how the system works is that if you want to approach the RBZ auction you go through your bank and you put in a bid and that bid has got the bank after it that is clear KYC (Know Your Customer) and submits it to the auction secretariat and that is the list that they consolidate with the committee.

“So the rates are explicit and there is no fixing whatsoever.”

Since its inception, close to US$5 billion has been released by the RBZ auction platform benefiting thousands of businesses that qualify to access the hard currency from the system.

Zimbabwe has faced a shortage of foreign currency since 2016 forcing the country to abandon in 2019 the US dollar monetary regime it adopted in 2009.

Currency board

Meanwhile, Prof Chakravat said authorities are considering the establishment of a currency board to back up the local currency.

A currency board is a monetary institution that only issues domestic currency that is fully backed by foreign assets.

“On the question of the currency board as researchers have indicated, it is something that is being looked at, it has all kinds of implications.

“It (currency board) has all kinds of implications and in particular, it requires a substantial amount of reserve money because people have to be able to convert that local currency freely into United States dollars or foreign currency on demand,” he said.

He pointed out that over 40 countries around the world including Hong Kong and Bulgaria successfully implemented the currency board and managed to reduce inflation that had reached unprecedented levels.

“The primary issue with the currency board has been implemented in over 40 countries very successfully.

“Through the implementation of a monetary board they reduced inflation from over 1 000 percent to 5 percent per annum so it’s quite remarkable what can be done with the currency board,” he said.

Prof Chakravat who is also an advisor to Finance and Economic Development Minister Professor Mthuli Ncube said “given that we have about $400 billion in local currency, that is broad money in Zimbabwe system at the moment, we will require about maybe US$600 million to US$700 million in a reserve to be able to back a currency board,” he said, candidly stressing that the country does not have that kind of money presently.

“We have problems with the international financial system, we have arrears, we have sanctions so, it’s not so straightforward but it’s certainly something we would need to consider and it’s being considered.”

Earlier in their presentations during the conference, researchers from Zimbabwe’s academia said they carried out research that confirmed the need for the country to have a currency board.

University of Zimbabwe lecturer Dr Benson Zwizwai said during the research most businesses and individuals were not conversant with the currency board concept but they were in agreement with the general principles of the board’s operations.

This, he said, was particularly on the need to have sufficient foreign currency reserves which would help quickly bring about confidence in the local currency.

“The currency board option needs to be subjected to research, interrogation and wide consultations. As an action-oriented and participatory research approach for this is strongly recommended.

“At the minimum, it is helpful to incorporate those elements within the currency board model that brings about stability, into the officially adopted partial dollarisation model that will operate till 2025,” he said.

In June this year, Prof Ncube announced that the Government will enact legislation to entrench the multi-currency which makes both the Zimbabwe and US dollars legal tenders for all local transactions for the duration of the National Development Strategy 1.

The development is aimed at bolstering confidence in the domestic currency.-ebusinessweekly