eBusiness Weekly
The above proverb gives a strong warning that if something is working and is proving to be sufficient for its intended purposes, any attempt to correct, fix or improve it is risky and might backfire.
The proverb comes to mind amid growing calls that the Reserve Bank of Zimbabwe must wean off the trading of foreign currency to banks.
Interestingly such calls, for the central bank to wean off the trading of foreign currency, come at a time the current auction system has been successful, not only by bringing stability to the exchange rate, but by meeting foreign currency requirements by exporters.
There is no doubt the auction market has played a huge role in serving as a foreign exchange market, based on an increase in the number of private players as well as the amount of foreign exchange that they are getting from the system.
The Zimbabwe dollar has remained stable for eight consecutive weeks with more than US$300 million having been exchanged.
Granted, not all economic players have access to the auction system, but it was never meant to be the sole provider of foreign currency in the first place.
According to authorities, the auction market is only for price discovery, accounting for between 20 to 30 percent of foreign currency trading.
The balance, which is the bulk, is trading through banks within permissible margins.
This seems to be the case so far. While millions of dollars’ trade at the auction every Tuesday, millions more are trading in between auctions.
Unless the players are really good at keeping secrets, which for their own good then shouldn’t, it seems the exchange rates being used are not far off from those at the auction.
Even on the parallel market, very few trades are still happening at an exchange rate above 100.
This week, the cash rate that was being quoted by street money changers strengthened to 85 from 90.
The strengthening of the Zimbabwe dollar has thus not only been confined to the auction system, but has been witnessed on the parallel market.
However, despite the positive trajectory that the system has exhibited since its inception, there are some economic players that still believe it’s not good enough and needs it to be fined tuned at best, or abandoned at worst.
Fear of the unknown
There are fears that the current system is not sustainable and all encompassing, but such fears are based on projections and assumptions, which might come true or not.
Commerce grouping, the Zimbabwe Chamber of Commerce (ZNCC), has been at the forefront and has since submitted to Government that the auction system should be truly liberalised.
In its 2021 national budget submissions, ZNCC says a managed forex system would create a false equilibrium between the Zimbabwe dollar and the greenback. The assumption here is that the auction system is being managed and will eventually fail the test of time.
The ZNCC argues that as long as the priority list is in existence, stability will only be for products that get foreign currency through the auction. But the fall in inflation to 8,44 percent in August and 3,83 percent in September is testimony that the stability is actually widespread and not restricted to the “few industries” accessing forex on the auction system.
“There is need to decentralise the auction system so that it can be done by individual banks rather than the central bank because banks have better visibility and interaction with clients,” ZNCC suggests.
“Frequency combined with decentralisation is key to achieving a market determined rate. All players, banks, bureau de changes etc should become active and until over the counter transacting of forex is made possible, we will continue to have unstable local currency. Though there has been a stabilisation of exchange rate, there is need for a reduced role of the RBZ in buying and selling forex, and have everything done by the market so that the rate is seen to be market determined for more confidence. The market has to be truly liberalised, RBZ should not influence the exchange rate. As long as the market is not truly liberalised we will continue to have a false equilibrium,” reads part of ZNCC’s submissions.
But with approximately 30 percent trading on the auction, banks are active participants in the trading of foreign currency.
Singing from
the same hymn
Economic think tank Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU), in its Economic Barometer Report for September expressed fear that while the auction rate has brought stability and strengthening of the local currency against the United States dollar, the system where the Reserve Bank of Zimbabwe is the main source of foreign currency is not sustainable.
Since inception the central bank has been the main mobiliser of foreign currency sold on the auction system and has managed to provide the scarce resources at various bid rates. The bulk of the foreign currency is most likely being sourced from the 30 percent retentions by exporters as well as from 20 percent of deposits from local transactions. This, according to the Deputy Minister of Finance Clemence Chiduwa, responding to questions in Parliament, has made the auction system self-sustaining, without any recourse to foreign currency borrowings. ZEPARU is, however, of the opinion that a more market-oriented price discovery system reduces risks by ensuring that the mechanics of price discovery are comparable at both the official and alternative markets.
According to ZEPARU, there are market fears that the sustainability of the auction system as currently structured only hinges on the capacity of the RBZ to continue to mobilise foreign currency from the exporters. Amid this background, the think tank suggests that the central bank should now gradually move out of the foreign currency market to ensure that the exchange rate is strictly market determined.
It said the role that RBZ is playing can be played by banks based on the instructions from their clients.
Banks are better placed to facilitate the selling and buying of foreign currency between firms, while the central bank can keep exporters’ foreign currency retentions as reserves.
“The envisaged advantage of such a system is that it protects the exchange rate from rapid shocks from its equilibrium state, while also reducing arbitrage opportunities that can be enjoyed by active participants at both the parallel market and the auction system,” reads part of the ZEPARU report.
The proposed system, according to the policy analysis and research think tank, may increase confidence among market participants and non-participants “as the extent of the exchange being market determined exchange improves while the RBZ plays its regulatory function to weed out malpractices”.
ZEPARU also expressed concern over the dual pricing regime in the goods market which it said need to be looked at to eliminate induced distortions in exchange rates.
The research think tank said the prevailing dual pricing (in foreign and local currency) at a time when there are so many exchange rates results in de facto dollarisation.
“Some shops are pricing their products higher in local currency by using the parallel market determined exchange rate, thus forcing buyers to opt to pay in US dollars instead of local currency. The implied parallel market rates are also not uniform among the different suppliers of goods,” reads part of the report.
ZEPARU said in order to eliminate induced distortions, there is need for a requirement for firms to display their exchange rates to avoid entrenching distortion of exchange rates and undermining the market rate set through the auction system. Government, through the central bank, has already made this a requirement although compliance has been very limited among economic players.
Let the auction be
While one cannot tell whether the auction system is being managed or not, what is clear is that it has played its role as a market for exchange rate discovery and the market has largely accepted as evidenced by the stability of not only the official rate but the parallel market rate as well. What we have learnt in the economy is that market forces, despite controls that may be put in place, will always determine the exchange rate of the day.
At the moment, it does not matter which market one picks, the bottom line is that the rate has stabilised and the premium between the official and parallel market rate has significantly narrowed.
There is thus no basis, apart from fear of the unknown and past experiences, to say the auction system is creating a false equilibrium. If anyone is in doubt, watch the parallel market rates. This week the cash rate between the Zimbabwe dollar and the US dollar strengthened to 85 from 90.
