Auction system could be the answer

26 Jun, 2020 - 00:06 0 Views
Auction system  could be the answer

eBusiness Weekly

Misheck Ugaro
The market is abuzz with excitement following the introduction of an auction trading system for foreign currency.

This is a culmination of several steps in the last one and half years which have seen many policy directives and reversals, all in an effort to finding a lasting solution to the currency conundrum of the country.

Many directives and measures were implemented starting from the abandonment of the 1:1 parity principle of the US dollar (US$) and the bond currency in circulation followed by steps that included the separation of local currency accounts from foreign currency accounts (FCAs); the banning of usage of US$ for local transactions and the launch of a local currency called the RTGS dollar (now ZW$) which worked alongside the long existing bond notes and coins; the establishment of a Monetary Policy Committee and a Currency Stabilisation Committee; followed by a first attempt at opening up the interbank foreign currency trading system on a willing seller willing buyer basis utilising the Reuters system which was later suspended.

The result was that this hotchpotch of policy measures did little to calm the run-away exchange rate  that slid from $2,5:US$1 at the beginning of these measures on the interbank market up to when the authorities reintroduced a pegged exchange rate regime with the rate set at  $25:US$1.

The market confidence continued to plummet as memories of the pre dollarisation decade of the 2000s began to creep back. The parallel market continued uncontrollably plunging to a level of  $100:US$1 by the time of the introduction of the auction system. Inflation kept on the gallop reaching above 765 percent at the end of April with projections to the end of the year set at above 100 percent. It became imperative for authorities to respond once and for all with an effective measure that would hopefully calm the seas.

The foreign exchange auction system officially became operative on June 25, 2020. The question on many economic agents’ minds is on whether this system will be successful this time around given the previous history of failure in 2005. Whether the country’s authorities have eventually found the silver bullet to tame the instability of the local currency now remains to be seen. Schools of thought, however, are mixed on the likelihood of success of the of the new system.

To all intends, our view is that the system is projected to be successful this time around as the country should draw lessons from the experiences of the past. This might be the answer finally and it calls for all parties to pull in earnest in the same direction.

We believe the parallel market may now be drawing to its end although it is common that it exists even in the developed world where it is really part of the underworld. The peculiar fact of Zimbabwe was that the parallel market had almost become the official route by which business accessed foreign currency. The official market was inefficient. The new system should now reverse this tendency and bring most transactions above board.

In order for the system to succeed and generate confidence, the authorities, must be seen to be acting in good faith without any interference. Several factors are key to the successful implementation of the system that include:

  1. While the rest are not ranked in order of importance, the most important factor though is the strictest control of money supply growth. Authorities are urged to diligently and faithfully keep this variable under tight control as the new system’s success or failure is completely dependent on this aspect.
  2. The scheduled weekly cycles must be faithfully honoured without any deviations of dates and must be as regular and sure as the sun rises from the East and sets in the West
  3. The opening date of the auction has provided a very good departure point with over 91 percent of bids awarded (US$10,3 million out of US$11,4 million) which should go a long way in generating confidence with the resultant weighted average rate settled at $57,3582:US$1. A sustained performance of this removes speculative tendencies.
  4. The next two to three auctions are extremely essential as that would begin to develop a trend that business can utilise in their planning. The market anticipates continued high levels of allocations for all bids submitted and will be carefully watching the shortfalls as to whether these will be increasing or declining.
  5. There is a widely held view that the rate will start with wild swings and it is for the authorities to gradually bring it down into a decent oscillations level in the short term.
  6. The authorities are urged to provide more transparency in the weekly reports by showing both sides of the trades.
  7. The authorities should now consider publishing periodic updates of the country’s import cover, which admittedly will begin at a minimum but is expected to grow over time especially if currency stability can be achieved thereby boosting investments and production leading to import substitution as well as export growth.
  8. The authorities could also publish the levels of retentions release that is now arising from the new operations and recent reviews of retention thresholds. This forms a critical source of funds for the auction system and the more transparent these figures are made the more confidence the market will generate from the system.

It is expected that the country may have finally turned the corner in the search for currency stability. This can now be set as a building step towards a foreseeable total liberalisation of the foreign exchange trading market. Over time the exchange rate is expected to stabilise before gaining with increased exports arising from increased industrial production. The allocations for the first auction show that about 51 percent (US$5,2 million) of the allocations went into raw materials, machinery and equipment financing.

This is a good priority strategy and efficient allocation which if continued should relieve pressure on the productive sector. The importation of raw materials will assist in improving import substitution for some finished goods.

Finally, it is acknowledged that the history of the authorities over policy implementation has not been optimal and therefore market scepticism still exists. The authorities have this opportunity to drive confidence once more and deliver the results that the country so eagerly anticipates.

Misheck is a former expatriate banker based in several SADC countries and currently works as a Corporate Advisory Services Consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. He can be contacted on (263) 777052004/712808140 [email protected] Linkedin:/ Twitter:

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