eBusiness Weekly
Misheck Ugaro
It is now generally accepted in the market that the foreign currency auction trading system has proved to be the silver bullet that was needed to calm the markets and that stability has eventually returned manifesting positively through price stability.
It is also about time that authorities are urged to take the next step in consolidating the gains so far.
The success of the auction system was buttressed by other measures including strict discipline in the fiscal space that removed pressure on money supply growth for the monetary authorities and hence made it possible to maintain a tight policy position.
In addition, the rogue mobile money platforms, which had become the conduit for illicit trade deals were sharply curtailed.
Altogether these measures succeeded in taming the wild fires that had become a permanent feature.
The next challenge for the authorities is how to take the next step towards a complete opening of the foreign currency trading market.
Can the auction be devolved into the banks? In short, can the market now be allowed to start trading by itself in between the auctions?
This is the next question that requires careful consideration.
The current weekly auctions scenario mean that rates are determined once a week and the expectation is that during the week the market relies on the previous week’s auction results.
This has saved its purpose of price discovery. We are observing that the rate movements on subsequent auctions is now stable with narrow oscillations within a reasonable band as is the case with any normal market.
It is a signal that the exchange rate, given the current economic fundamentals such as interest rates, inflation, the current account and the fiscal balances as well as expectations has settled.
The external trade position has also been improving with a narrowing trade deficit. It is an opportune time for the authorities to begin to step out of the trading system and allow players to start trading independently in between the auctions.
The question though remains on the willingness of the banks to start trading on the interbank market in-between the auctions with that leading to free trades transparently using the Reuters system as had originally been anticipated.
In the past, banks have been guilty and have not been forthcoming at the time when Reuters was launched before its being put on halt.
The current system has saved its purpose and there is a risk that it may begin to create expectations of some tinge of rate control by the Central Bank.
Alternatively, the authorities may be advised to announce a clear roadmap with time-lines of when and how the system will be transformed into a purely interbank market driven say over the next six months to a year period.
It is also about time that Bereaux really come to the table and raise their visibility and increase their trade volumes. There are calls beginning to emerge from players for the authorities to now shift gears.
Whereas at the beginning, players had doubts on the sustainability and likelihood of success of the auction system, it is a positive sign that players are now calling for the authorities to allow trades to happen in between auctions showing the market has now acknowledged the auction system’s efficacy.
This is not to say trades are currently not allowed in between auctions. Players can trade with their banks in between auctions but using the auction rate as a guide which scenario is beginning to be interpreted as some form of control by the authorities.
The challenge is for the whole market, led by the banks, to honestly begin to trade on the interbank market with regular reports submitted to the central bank.
It all hinges on the expected future direction of the economy though and to that scope, the forthcoming budget presentation by the Ministry of Finance and Economic Development will also be a significant indicator of the way forward.
While it is anticipated that an expansionary budget will be announced, the financing of it has direct consequences on monetary policy and hence pauses downside risks on the exchange rate and partly may explain the hesitancy by the authorities to move on out of the auction system to an open market system.
This is why it is important at least for the authorities to provide a clear road map of the anticipated direction in order to maintain the current positive mood, which stands on the edge, and can easily be wiped away at any signs of hesitancy.
What remains topical though is how the Government is going to resolve the civil service salaries question epitomised by the current widely spread strike by teachers.
We have in the past called for complimentary action by the private sector, especially the banks, to step in and provide room for civil service benefits through guaranteed facilities such as housing and car loans to teachers using the same deduction code used by MFIs to advance small loans to civil servants.
This is a way to alleviate the need for the Government to fund the bill as it obviously does not have the money.
Any monetisation of a resultant deficit will wipe away the current gains, which will impact on all market players anyway through a deteriorating economic environment.
Innovation by the private sector is required to support the Government’s efforts which have so far achieved the current position and it is in the interest of everyone that must be protected.
Misheck is a former expatriate banker once 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 is the Vice President of the Zimbabwe Economics Society.
