Forex Auction’s contribution to foreign payments up 153 percentage

The foreign currency auction system is fast becoming a major source of foreign currency for businesses, latest figures from the Reserve Bank of Zimbabwe (RBZ) show.

The foreign currency auction system was introduced towards the end of June last year as authorities looked for a lasting solution to foreign currency shortages and a volatile exchange rate.

At some point, the parallel market exchange rate traded at a 300 percent premium to the official exchange rate which was pegged at $25 to US$1.

But since the introduction of the foreign currency auction system, the exchange rate has been relatively stable ,weakening slightly from 82 to the US dollar in July last year to 85.5 last week.

The premium between the parallel market exchange rate and the official exchange rate, though still high, has also narrowed to approximately 60 percent.

Part of the blame on the significant premium between the auction rate and the parallel market rate is that the auction system’s contribution to foreign payments was seen as low.

Blame was also put on delays to access the foreign currency by winning bidders at the auction.

According to the Confederation of Zimbabwe Industries, delays could be as long as eight weeks, though the times have now been narrowed.

A survey by the CZI for the first quarter of 2021 had some companies complaining that it was taking significant time for them to access foreign exchange at the Foreign Exchange Auction Market.

The Business Management Organisation said the delays “creates the possibility of sourcing forex on the parallel market”.

Latest figures from the RBZ, however, show the auction system is now a significant contributor to foreign payments.

Between January and June 2021, the auction system contributed 33 percent or US$917 million of total foreign payments of US$2.7 billion.

In its first six months of operation, between June 23 and December 2020, the auction system only contributed 13 percent or US$627 million of the total foreign payments bill of $4.79 billion.

This means the auction system contribution in exchange rate discovery can no longer be wished away, as happened in the past.

In the past, critics would look at its small contribution as a reason to dismiss the auction system from exchange rate determination.

Foreign Currency Accounts (FCA) also known as Nostro accounts remain the major contributor to foreign payments although the ratio has significantly gone down.

In the first six months to December 2020, the contribution was 77,6 percent but that has since come down to 59,6 percent in the last six months to June 2021.

While FCAs were the source of US$3,7 billion in the six months to December 2020, the figure dropped to $1,67 billion in the six months to June 2021.

The US$2 billion difference could be attributed to changes in exchange control regulations which now allow exporters to keep their foreign currency for a little longer.

Before the new regulations, exporters would stampede to spend all they had on fear of having the funds liquidated.

But at its first meeting this year, the RBZ’s Monetary Policy Committee resolved that exporters are no longer compelled to sell for local currency unused export receipts after 60 days as has been the case.

Before the decisions, all export earnings not used after 60 days, except with special dispensation, were subject to compulsory liquidation at the going market rate.

However, the 60-day period for the compulsory liquidation of export proceeds failed to result in an increased inflow of forex to the auction market.

Instead, the requirement increased the urge by exporters to use all their forex before the grace period lapsed.

The seasonality of the two periods under comparison can however not be ruled out to be a source of the improvements.

The period between July to December 2021 would give a better picture although the changed rules and regulations, as well as the teething problems of last year, will always leave a margin of error for comparisons.

Meanwhile, since its introduction a total US$1,406,974,891 has been allotted under the main foreign exchange auction while a total US$138,006,372 has been allotted under the SMEs foreign exchange auction.

The bulk of the funds, accounting for 69,3 percent of the funds allotted through the auction system were towards procurement of raw materials (US$639.2 million), machinery and equipment (US$281.2 million) and consumables (US$150.0 million).

In its report released Thursday, the RBZ said “these allotments have been critical in spurring industrial development and the sustainable growth of the economy”.

“Funding of foreign exchange requirements from the foreign exchange auction system has also been a key factor in the growth of the SME sector,” reads part of the Report.-ebusinessweekly.cl.zw