The process of price discovery at the US dollar auctions being run by the Reserve Bank of Zimbabwe has reached a point, after six auctions, where the bid range has sunk to around 9 percent between the top and bottom successful bids and, perhaps more critically, to just over 6 percent for almost all winning bids.
So we now all know, reasonably precisely, how market forces value the US dollar for purely commercial purposes, excluding those who wish to build up reserves of foreign currency, those who wish to export capital without seeking permission, and those who wish to speculate in currency markets.
A great deal of pent-up demand by local producers for paying foreign suppliers has been drained by these first six auctions, although there is probably still going to be pressure from importers who want to build and maintain stocks of raw materials at levels beyond “just in time” supply. The global transport systems have been hit by movement controls, and foreign suppliers might suddenly be out of action for a week or two under their lockdown regulations. And there is unlikely to be total confidence in Zimbabwe that an importer can buy foreign currency at an auction two months from now.
But generally importers now reckon they can do their sums right and that explains the far narrower bands in successful bids, and the continual fall in the top bid each week, as the importers desperate for foreign currency realise that they can still bid on the high side, but that there is no need to link their bid to black-market rates any more.
There is also a growing use of the banking system. One Government official at Tuesday’s auction was quoted as saying that banks are now buying nostro money and selling nostro money in house, using the auction rates but with their margins built in, rather than using the auctions. That official was a bit critical of that process, but wrongly.
In most countries it is the banks who do most of the routine foreign currency trading, especially when there is a set rate created either through central bank intervention or through a stable market.
For a start in Zimbabwe, smaller businesses cannot access the auctions. Not everyone has almost $4 million handy to buy US$50 000, the smallest permitted bid, and not everyone needs that pile of US dollars to buy their imports. So long as the banks continue to trade by the RBZ rules, those set for the auction bidders, of demanding invoices for imports in priority categories, insisting that nostro accounts are first run down, and that all taxes have been paid and export trades accounted for, then this service is, in fact, welcome.
The auctions can set the exchange rate, with the big buyers doing the hard work and using their access to financial talent to read the markets accurately, and everyone else can then use those rates for risk-free buying and selling. This would be a bit like the tobacco business, where only a small fraction of tobacco is sold at auction, that from the major producers, but the prices generated at the auctions are used to calculate what the bulk of the crop, produced under contract, is worth. That system works extremely well.
Besides allowing the small importer access to foreign currency, bank dealing also is able to give both sellers and buyers of foreign currency very precise prices for a whole week, and that sort of price stability is critical for the smaller exporters and importers.
The RBZ obviously has to keep its eyes on this banking trade, but generally the central bank and the commercial banks now have a functional relationship and the huge surges and depressions of the Zimbabwean economy, plus the banking oversight, has removed the wheeler dealers and rule breakers from the banking system, leaving the conventional bankers who make legitimate profits by really knowing their customers, and building up lists of businesses they can really trust. The more trustworthy customers you have the lower the risks.
Even the black market has stabilised after several auctions. It runs rates higher than the auction rate, at least for electronic payments, but not that much higher and the premium can be explained by the sort of customer who enters that market, people who need foreign currency for stashing in safes or for smuggling, along with those who want small amounts of cash.
One interesting development is that those getting those small diaspora payments and wanting Zimbabwean banknotes, rather than a digital transfer, can actually get a better rate at a bank counter or bureau de change than they can on the pavement. This possibly explains the very small notes that are now traded on the pavement, with the vendors offering instant convenience for those wanting bus fares or tomato money.
But with all these positive developments there are still three areas that need attention.
The first is that some exporters are still overpricing their retained foreign earnings. The last auction apparently saw a block of sell offers that were significantly higher than the top bid. As the importers have now done, exporters also need to know to read the markets when they have to sell or want to sell. Price discovery is a two-way process.
But that leads to the second problem, that holders of nostro money and US dollar banknotes can pay a lot of local bills now in foreign currency, and can negotiate a rate. This concession was created at the start of the lockdown as a temporary relief measure, but is starting to get out of hand and distorting markets.
One way out of the problem would be to cut back on the list of permitted dual pricing and put limits on an individual trade. It can be done gently, a step at a time, and meanwhile the Government and the RBZ can start enforcing those new rules and new laws that make dual pricing mandatory at the auction rate, not at some negotiated rate, and enforcing the older laws that require all cash collected in business to be banked or, at least, accounted for.
The fact that the Government itself, with its dual currency tax collection system, is contributing to this outlook by exporters is delaying the process to where everyone thinks “local” and runs accounts in local currency.
One particular area, the third problem, is the fuel trade. It is almost impossible now for the ordinary motorist or small business to buy fuel at the set Zimbabwean dollar price, and we suspect it is difficult for the larger businesses. This feeds the black market for US dollar banknotes for a start, as the ordinary motorist has to stop by a dubious person standing on the pavement to buy a US$20 note or two on the way to the service station, and feeds the desire for payments in US dollars for local services and goods, since so much transport has to be costed in US dollars.
The gap between the US dollar price for fuel, and the local price, is also very high, even though energy regulator Zera uses the auction rate to set maximum prices. But the tax differentials and the different ways of calculating subsequent mark-ups mean that even at auction rates fuel costs almost three times as much when paid for in foreign currency.
That must be producing arbitrage possibilities, and there is a general belief that there are many at least dabbling in arbitrage, buying in local currency and selling in foreign currency. The law already allows fuel to be coloured, and that would be start, so it would be easy to see if someone was buying legitimate direct-import red fuel for foreign currency or local dollar green fuel.
But at some stage the fuel prices need to be brought into alignment, albeit at the auction rate. Either oil companies buy their own foreign currency on the auctions, and with the auction rate now reaching a metastable position with narrow bid bands this is possible, or if the authorities still want to continue mopping up free funds then the tax and price calculations need to be aligned.
Running two separate fuel businesses at widely different prices cannot be a good idea and cannot continue. While we can criticise the problem that dual pricing in ordinary business dealings can cause, a switch from the dual business fuel model to ordinary dual pricing would be an advance in the fuel business.
So far the auction system has fulfilled the desire to have a proper market-led and transparent process of price discovery. Now we need to build on that and start removing distortions that still infect the economy and continue building on using that price discovery process to build ever more general acceptance of a national exchange rate. It does not, and cannot, be an instant process, but by taking it one step at a time as confidence builds we can get where we need to be.