Forex auction so far so good, says CZI

Zimbabwe’s most influential business lobby group, Confederation of Zimbabwe Industries (CZI), says the foreign currency auction system has ushered in a “fresh breath of air” following stability of the exchange rate and a slowdown in the rate of inflation.

Without a proper market exchange rate determination system, market prices were being indexed or referenced to a constantly changing black market rate, which resulted in rapid inflation increases.

CZI said in its first review and opinion on the system that the foreign currency auction trading system had brought about refreshing air, citing the many positives that the economy is deriving from the newly introduced forex marketing system adopted on June 23, 2020.

The Reserve Bank of Zimbabwe (RBZ) adopted the Dutch Foreign Currency Auction after failed experiments with an interbank market, which had been in use since the Zimbabwe dollar was reintroduced in February last year, after a 10-year hiatus.

Before introduction of the auction system, Zimbabwe had briefly flirted with a fixed rate regime, with the local unit pegged at $25/US$1, since March 2020, as part of interventions to foster stability after the state of emergency declared to contain the spread of Covid-19.

Between February 2019 and June 2020, Zimbabwe experienced rapid inflation increases caused by exchange rate volatility on the parallel market, absence of an effective formal market for foreign currency, limited access to forex and a thriving black market for the elusive commodity.

“The positives include the stability of the exchange rate on both the formal and informal markets as well as the slowdown in inflation. There has also been increased access to foreign currency by businesses,” CZI noted in its comment.

CZI, however, urged authorities to adhere to the current practice where there is no manipulation, interference and policy inconsistency.

The business member organisation also called for the fine-tuning of the RBZ guidelines that govern trading on the auction to remove any confusion among market players.

The auction system, according to CZI, can also be strengthened by balancing money supply and demand, practicing fiscal prudence and monetary discipline as well as levying taxes and fees in local currency.

More than US$370 million has been allotted towards various import requirements since the RBZ introduced the foreign exchange auction system on June 23 this year, helping to stabilise the exchange rate, prices and importantly, prices.

The auction market now meets a reasonable level of foreign currency needs of a cross section of registered businesses in the country that require forex for key imports, such as raw materials, equipment and machinery, services and consumables.

Since the first auction was held on June 23, 2020, there has been exponential build up of market confidence in the auction system.

The auction rate has stabilised since September 22, 2020 with the US dollar to Zimbabwe dollar rate now hovering around US$1:$81,3 and this has caused stability in prices and drastic drop in inflation.

When first floated on the interbank market in February 2019, its second coming, the Zimbabwe dollar rate was pegged at $2,5/US$1. The southern African country had used a US dollar dominated multi-currency regime after scrapping its then inflation ravaged unit in February 2009.

Measures introduced by the central bank such as the adoption of the foreign currency auction system and restrictions on the transaction thresholds on mobile money platforms have also helped reduce inflation.

Zimbabwe’s annual inflation fell to 659,4 percent in September, 2023, according to the National Statistics Agency (ZIMSTAT), from 761 percent the prior month. The annual rate had hit a post dollarisation record of 837 percent in July, 2020.

Zimbabwe had the highest annual inflation rate in Africa at 761 percent in August 2020, a 24,5 percentage points decline from 785,6 percent recorded in May 2020. The high inflation is largely a result of indexing of prices to the parallel market once runaway exchange rates before the introduction of the auction system in June this year.-ebusinessweekly.co.zw