Forex auction system transparency queried

29 Jan, 2021 - 00:01 0 Views
Forex auction system transparency queried

eBusiness Weekly

Business Writer 

Industry has once again called on the Reserve Bank of Zimbabwe to improve its disclosure levels if the foreign currency auction trading system is to remain sustainable. 

Zimbabwe currently uses the Dutch Auction system to trade foreign currency. The system was introduced on June 26, 2020. 

Under the Dutch auction, the exchange rate is determined after taking in all bids to arrive at the highest exchange rate. The highest bidder will then be allotted their requirements according to a set import priority list. If there is still some foreign currency left, the next bidder will be considered. 

Approximately US$500 million has been traded using this method with the exchange rate remaining fairly stable between 81 and 83 for close to five months. 

While the auction system has been credited for bringing stability to the exchange rate and inflation, keeping the market in the dark in terms of how much foreign currency is available has meant importers have insufficient information to base their bids on.  

Under normal markets, bids are informed by the amount of foreign currency available. If there is more foreign currency available, bids could be lowered, but if there isn’t much available, bids can be higher.  

The market has, however, been working without this key information with importers blindly bidding. Fortunately, the RBZ was able to meet supplies, but only up to mid-November when reports started filtering through that successful bidders were not getting access to the foreign currency on time. At some point the backlog was as long as five weeks.  

Market watchers interpreted this as weakness in the auction system, which seemed to be offering more than it had at lower bids.  

Accepting lower bids, when there is insufficient foreign currency available makes the whole exchange rate stability fallacious, according to financial analyst Walter Mandeya. Mandeya said one of the reasons 

why exporters had not voluntarily participated on the auction system is because the central bank was guaranteeing bids at lower levels even at times when its coffers could not meet demand. 

“We are always told that all successfully bids were allotted their requirements in line with the import priority list, but we also know the RBZ has often struggled to meet its obligations on time. 

“For whatever reason, it speaks to a mismatch between demand and supply. 

“The supplier is being dishonest,” Mandeya said. 

With the premium between the auction system and the parallel market widening to as high as 40 percent, demand for foreign currency at the official auction system also increased significantly.   

This week, the number of total accepted bids on the main auction went up above 300 for the first time since the auction was established. 

Only 223 of the accepted bids got allocation. 

At previous auctions, total accepted bids averaged 250 and they were always allotted in line with the import priority list. 

Noting the danger to the sustainability of the auction system, the Confederation of Zimbabwe Industries has now called on the central bank to declare the quantity of foreign currency on offer at each given auction. 

In a communiqué to its members, the business representative body said the long delays in the settlement of auction bids may be a reflection that the auction is not fully reflecting the market laws of supply and demand or there are serious bottlenecks in the banking system.  

CZI said it will undertake an online survey after each auction to track how long it is taking for members to get their bids settled “so that we can engage authorities with real data from members.”  

“The auction system, should declare how much is on offer before the start of each auction, so that bidders are aware, and the highest bids should be allowed to win,” said CZI.  

The Business Membership Organisation (BMO) added that there is need for transparency on how the foreign currency being generated (by the Government) is being utilised.  

“The foreign currency collected by the Government through taxes and other fees must be availed to the auction at the same way that exporters are surrendering a portion of their earnings for the auction.  

“There should be a surrender portion for treasury and other departments and agencies collecting forex revenue
to ensure supply to the auction is sustained.” 

CZI came in defence of exporters saying the Government needs to be wary of over taxing the exporters as they are ‘killing the goose that lays the golden egg’. 

“Exporters are being heavily taxed through the 40 percent surrender, and this will lead to the destroying of the export business.”

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