RBZ auction system slowly losing out: Analysts

The Reserve Bank of Zimbabwe (RBZ) weekly foreign currency auction is slowly losing relevance and becoming a minority market due to reduced allocations per auction session to an average US$13 million from as much as US$35 to US$40 million, analysts have said.

The auction was set up as a price discovery mechanism for the local currency as well as availing foreign currency to local companies needed for procurement of raw materials and retooling.

For the greater part of the year 2021, the RBZ struggled to meet demand of foreign currency on the auction resulting in a backlog of about US$300 million, which the Bank has since cleared.

It is during this period that companies devised other alternatives and rely on the Willing Buyer Willing Seller (WBWS) and Foreign Currency Accounts options to source foreign currency which has seen marked reduction of allotted volumes from the auction.

According to this week’s auction report, a total US$13,8 million was allotted, with US$6,8 million allotted towards raw material bids.

Economist, Dr Renneth Mano, said the weekly auction is becoming increasingly insignificant relative to the weekly and monthly demand for foreign currency just for merchandised imports alone.

“Right now it is degenerating into a minority market of no substance because most of the money is now being procured from the grey markets,” he said.

He added that if the auction is to be restored as a primary price discovery mechanism, the volume of that auction should not be less than 30 to 40 percent of the monthly requirements of importers.

Investment analyst, Rufaro Hozheri, noted that the confidence on the auction system has always been there as market participants who chose to get foreign currency from the auction received it, however, the critical issue is whether the auction system is still relevant.

“There has been a significant decrease in the allotment numbers, which might be highlighting that some market participants no longer play in that market.

“Remember one of the initial objectives of the FX market was price discovery, but now the WBWS dictates the official exchange rate,” he said.

The RBZ recently said it will now abide by its own rules which it had violated for the greater part of last year after it failed to avail foreign currency to successful bidders within 14 days from the date of auction.

The Bank advised that it had cleared the backlog of foreign exchange allotments under the foreign exchange auction system largely as a result of improved foreign exchange inflows in the country.

Mano said now that they have cleared the backlog, they now need to move to restore confidence in the RBZ management of the auction system in as far as honouring the successful bidders and paying them on time.

In a recent update, the Central bank said it had allotted US$3,7 billion through the foreign exchange since its introduction in June 2020 with the bulk having been channelled towards importation of raw materials and machinery.

Economics Professor, Gift Mugano, said last year’s imports increased by US$1 billion which shows companies are sourcing the funds away from the auction.

“We need to understand that businesses have moved from the auction and are using their own generated cash,” he said.

Vince Musewe, another economist said the RBZ auction system is now a secondary price discovery mechanism because what they want is the WBWS to be the key determinant of the ruling price.

“Therefore the auction is going to play a lesser role compared to the WBWS which is now becoming more effective,” he said.

He said there is need for more market liberalisation so that the allocation of foreign currency is determined by the market.

“Through the WBWS we are slowly moving there and it is becoming the dominant market place where people and businesses are getting the foreign currency and with the increased inflows, that will be good for the economy,” he said.

However, Mugano noted that while RBZ now has the capacity to sustain the auction system due to improved foreign currency inflows, there is a need to maintain it in the positive.-ebusinessweekly