By Toby Sithole
Last week, Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mangudya, announced the introduction of a foreign exchange auction trading system with effect from June 23, 2020, which effectively means the abandonment of the fixed exchange rate regime, adopted three months ago.
Oh no! The statement was met with so much negativity from doomsayers who could not even acknowledge the fact that the auction system was a step in the right direction considering that the fixed exchange rate regime, though relevant at the time of its introduction, had become obsolete.
Life may give us lemons, sometimes more than others, but it’s important not dwell on the negatives because such cynicism can spread like a disease, affecting not only the naysayers, but their perception of others.
American author Bobby Darnell was right when he said that negativity is cannibalistic because the more you feed it, the bigger and stronger it grows. What he came short of saying is that gloom-mongering which is becoming an occupation for some in Zimbabwe, is a mental prison capable of trapping us in perpetual fear, anxiety, anger and despair.
Instead of continuously feeding the monster by mocking each and every policy initiative by the authorities, it is about time we break free from the imprisonment of the mind and, in this case, make the best of the trading system which, according to the Dr Mangudya, is expected to bring transparency and efficiency in the trading of foreign currency in the economy.
A number of countries that have experienced crises with their national currencies took this route with encouraging results, particularly for those that ensured that the system operates efficiently, transparently and with the full support of market players.
After 25 years of economic turmoil in Guinea, the government of then president Lansana Conte launched sweeping reforms that were aimed at putting that country’s economy on a private sector footing, which included devaluing the domestic currency and instituting a foreign currency auction system as a step towards market-determined rates.
That system worked well for Conakry whose economic growth has remained steady, thanks to reforms improving the business environment.
Nearly a dozen African countries are using the auction system with Angola, Egypt and Ghana being are among states that are using variations of the system. In 2018, Angola stopped controlling the exchange rate and started auctions which allowed the Kwanza to depreciate.
Ghana also has an auction system which it operates transparently. In fact, the Bank of Ghana has already released a calendar, informing the market how much it intends to sell in its forward auctions for 2020; a total of US$715 million is planned for its auctions this year.
In the words of former Prime Minister of the United Kingdom, Winston Churchill, “a pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty”.
Instead of rubbishing what is arguably the only viable alternative at the RBZ’s disposal, we must get the auction system to work for us and deal with the weaknesses which may arise as we go.
In as much as innovation has taught us to survive under the “new normal” occasioned by the Covid-19 pandemic, positivity can give us a head start while we, collectively, address the multiplicity of other challenges affecting our country, which Julius Nyerere once referred to as “a jewel” of the African continent.
After the fixed exchange rate had been overtaken by events in the wake of soaring rates on the alternative market, the authorities were bound to bite the bullet in one way or the other.
Of the alternative exchange rate regimes available, namely intensified administrative allocation of foreign exchange at the prevailing fixed rate, over-devaluation of the fixed rate to match rates on the parallel market, crawling peg regime or freely floating market, it is plain to see that the Central Bank took the correct path.
In comparison with intensified administrative allocation of foreign exchange, the exchange auction can be a more efficient instrument for rationing a given amount of foreign exchange, including when the auction is simply a part of a multiple rate regime.
With an auction-determined flexible rate, the central bank can also avoid the difficult task of selecting an appropriate rate after a crisis which is the case with fixed rate regimes. It can thus be assured of restoring some reserves without resorting to the other extreme of an undervalued currency.
Attempting to chase the parallel market which has been hijacked by currency manipulators by floating the Zimbabwe dollar would have been a recipe for disaster. For now, the crawling exchange rate, which will be adjusted in line with economic fundamentals from time to time, shall only be used for government and debt service (including blocked funds) transactions.
The auction regime can be perfected as we go. It could incorporate special treatment for other categories, should that be viewed as necessary, for example, allocating minimum amounts of foreign exchange to petroleum or medicines, as long as these categories do not exhaust the supply.
However, a difficulty might arise if it is perceived that the so-called productive sectors do not have sufficient access to foreign exchange to compete in the auction with the: more liquid trading sector or if the government’s own access to credit is unrestricted.
While it is administratively cumbersome and its properties have yet to be fully explored, the exchange auction most likely will prove to be a relatively popular alternative in light of Zimbabwe’s peculiar circumstances.
There is no denying that Zimbabwe is currently operating under special circumstances that, according to Dr Mangudya’s predecessor, Dr Gideon Gono, require extraordinary measures. But for any system to succeed, it needs support, including market discipline from the players themselves.
As part of the ground rule, the RBZ has said any entity found participating on the auction for the sake of currency manipulation shall be disqualified from participating on the system.
Similarly, entities with positive balances in their Nostro accounts will be disqualified unless they provide justification. An Exchange Control flagging system will be used to identify delinquent participants and as a result bids by red flagged entities with overdue Forms CD1 shall be disqualified at Authorised Dealer level.
Entities must comply with regulations applicable to the repatriation of export proceeds to the country; entities with overdue and unacquitted Bills of Entry.
Given the support and market discipline, the auction system will turn out to be an appropriate response to Zimbabwe’s exchange crisis.
For feedback, contact Toby Sithole on email@example.com. Mr Sithole is an expert in corporate governance. He writes here in his personal capacity.