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Nathan Gurira: Forex exchange auction trading system off to a good start

By Nathan Gurira

The foreign exchange auction trading system has made a good start when it kicked-off in Harare today (June 23, 2020), without any great difficulty.

Reserve Bank of Zimbabwe Governor Dr John Mangudya
Reserve Bank of Zimbabwe Governor Dr John Mangudya

On its first day, bids worth about US$11,4 million were submitted to the auction through registered dealers (banks), of which tenders worth about US$10,3 million were allotted foreign currency (forex).

The highest bid was ZW$100 to the United States dollar (US$), while the lowest bid was ZW$25,5 to the US$, giving a weighted average rate of about ZW$57,4 to the US$ which was in line with market expectations.

Until the next auction on Tuesday (June 30, 2020), forex trades will be at ZW$57,4.

Raw materials took up about US$2,9 million of the allotted amount, followed by machinery and equipment at US$2,4 million.

Other successful bids were for food and beverages (US$1,4 million), services (US$1,4 million), consumables (US$1,3 million), portfolio investments (US$436 million), etc.

The forex auction replaced the fixed exchange rate regime that had to be discarded by the Reserve Bank of Zimbabwe (RBZ) after it became obsolete due to hyperinflation.

In 2004, the Bank under Dr Gideon Gono had attempted a limited version of the system called the Managed Foreign Exchange Auction System, but abandoned it after the market scorned at attempts by the authorities to manipulate the rate.

This time around, the Central Bank which is now under Dr John Mangudya has gone full steam ahead with the auction system for most of the external payments, except for those to do with central government, promising not to interfere in its operations.

At ZW$57,4 to the US$, the rate is much lower than the ZW$105 to ZW$120 range obtaining on the alternative market, which begs the million dollar question; who is buying forex at that steep price and for what purpose?

While the Financial Intelligence Unit is still searching for answers to these knotty questions, word has it that the parallel market rate is being manipulated for either speculative or political reasons. The latter has unnerved the government which threatened to come hard on “economic saboteurs”.

With Tuesday’s auction producing a rate of ZW$57,4, the authorities will certainly claim that their suspicions have been substantiated. It is also improbable that there is appetite for genuine business transactions at ZW$105 to ZW$120 without pricing the final product out of the market, considering that aggregate demand has hit its lowest ebb.

Assuming this to be the case, black market rates may come down significantly in the coming days provided the RBZ does not interfere with the system’s functionality. This should not be difficult to achieve.

To meet its forex requirements on a monthly basis, Zimbabwe requires between US$80 million and US$100 million. This figure includes the forex needs of companies that have the resource in their Nostro accounts.

If you are to exclude those with the forex in their Nostro accounts and, therefore, do not qualify for the auction, this open tender should cater for a gap of between US$40 million and US$50 million, monthly, which is within what the country can afford, even under the obtaining difficult economic circumstances.

The onus is therefore on the Central Bank to maintain high levels of transparency to guard against the manipulation of the auction system while ensuring that the resource is being utilized efficiently.

For the auction system to operate efficiently and effectively, it must gain credibility, which is a by-product of transparency which RBZ Governor, Dr Mangudya and his team at the Apex Bank have promised to uphold.

It is also important for the forex accessed through registered dealers to be applied consistent with the documentation lodged for this purpose. Bidders should be tightly monitored through documentation requirements such as evidence of paid up tax, deposits with the commercial bank filling the application, and import and export invoices.

Those who stray beyond the red-line must face the music, with the law being applied without fear or favour.

Disqualification from the auction system should also not be done on an ad hoc basis lest it will be construed as attempts to forestall the continued depreciation of the Zimbabwe dollar. Justifiable grounds must be given for those whose bids are thrown out.

But like with any new system, there are bound to be some imperfections that need refinement: For example, that the lowest bids start at US$50 000, clearly shuts out smaller companies.

In future, the auction should lower the entry thresholds to accommodate the smaller operators, who may end up quenching their appetites for forex on the alternative market or having to consolidate their invoices, which is cumbersome.

It is also important to maintain transaction costs within reasonable levels and ensuring that the processed involved in preparing bids – from the application procedure to the bidding process – is streamlined so that it does not act as a disincentive to use of the auction.

It is to be expected that while the auction system should take care of all forex requirements, for now priority must be given to critical imports and not luxury items.

It is sickening to note that the country spends in excess of US$2,2 billion or 42% of its total imports on commodities that can be produced locally which, inter alia include cereals, vegetables, mushroom, paper, tooth picks, pampers, chewing gums, etc.

While it may seem reasonable not to accommodate these in the early stages of the auction when it may be vulnerable to speculative pressures, inevitably the system must be liberalised to increase competition and drive players from the parallel market, while also decreasing the volatility of the rate.

That way, the auction system can assist achieve the steadiness of the exchange rate which is sine quo non to price stability and the general cost of living.

Nathan Gurira is an economist. He writes here in his personal capacity. He can be contacted at [email protected]

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