LAST WORD: RBZ needs to explain exhange rate policy

05 Nov, 2021 - 00:11 0 Views
LAST WORD: RBZ needs to explain exhange rate policy The Reserve Bank of Zimbabwe

eBusiness Weekly

Businesses and companies now desperately need some sort of indication from the Reserve Bank of Zimbabwe what is the policy on the exchange rate, as the signals, sometimes interpreted as mixed signals, are becoming harder to understand.

This week’s auction saw the rate of firming of the US dollar decline, but it was still an effective devaluation of 1,9 percent to $98,9821 which almost all bidders had factored in when making their bids. 

The cut-off point for allotted bids rose from $95 to $96, but hardly anyone was affected. Just three of 608 bidders in the main auction with acceptable paperwork missed out on allocations of a total of around US$18 000 by that raising of the minimum bid accepted for allotment, a trivial fraction of the more than US$36 million allocated, like 0,05 percent. These three were bidding between $95 and $95,9999.

It was pretty much the same on the SME auction where 14 of the 1267 accepted bidders missed out on allotments totalling less than US$10 000 of the more than US$10 million allotted, or less than 0,1 percent. Again they had bid at least $95, but less than $96.

These sort of miniscule non-allotments had almost no effect on the amount of currency allocated and so missing out on the allotments was hardly a case of the Reserve Bank running out of foreign exchange before all accepted bids were satisfied. The only reason for pushing up the cut-off point would have been to send a signal.

That signal could only be that the Reserve Bank reckons that the local currency needs to drift down a little more and that bidders should be exceptionally wary about seeking anything that could be considered a bargain.

The 1,9 percent easing of the local currency was explained not by the higher cut off, but by bidders pushing up their bids, having read the signals seen in October. While the top bid, on both auctions was $120, the weighted average suggests that most bids were in narrower range, possibly something between $96 and say $105. Quite possibly, if we assume that the weighted average was close to the mean then most bids must have been between $96 and $102.

But those very high maximum bids means that there is at least one bidder on each auction who paid more than 20 percent above the average for their currency, and in fact bid more than 24 percent above what turned out to be the minimum bid that would have won an allotment. We can only hope that these bidders were either sole owners or had the backing of their major shareholders for such bids, otherwise there could be some vacancies in some financial posts in some companies.

But equally obviously there are some desperate bidders, who simply must get their allotment or go under and they were taking no chances, just as there were some lucky bidders who simply inched up their bids, and still bid below last week’s average or $97, 1361 and still won through.

That percentage increase in the average, of almost exactly 1,9 percent, was as a result less than half the 4,36 percent rise the previous week, and less than two thirds of the 3,33 percent of the week before that. It was far more in line with the 1,7 percent we saw in the second week of October.

But a bid band, on both auctions, of $25 with the allot band being $24, is very large and shows the huge levels of uncertainty in business circles. These translate in percentage terms when compared to final average of just over 25 percent on bids and 24,25 percent on allotments. Those sort of bid bands were last seen more than a year ago when the initial process of discovery was still in progress as everyone tried to estimate what the eventual settled level would be.

There is a growing feeling that the Reserve Bank is not just managing the system on the basis of money supply, but is also factoring in the monthly inflation rates. If that is so, some sort of indication should be given to back the signals coming from the auctions. 

The two can work together. While factoring in inflation does, in theory, fuel inflation, the fact that the foreign currency component of final price is always less than 100 percent, and in many cases a lot less, means that an inflation-linked exchange rate will have an effect lower than the final inflation. At the same time factoring in inflation does reduce money supply, by making the foreign currency more expensive.

There almost certainly is no simple answer, with the allotment cut-off decided by a number of factors from availability of currency to put on the auction right down to a number of policies. But the market is nervous, and business stability could be enhanced by a clearer guide.

At the same time the black market has become less of an indication. The buy rates have stabilised. Street buyers, the bottom layer, are still offering $130 cash and $140 transfer, with the middle level used to dealing in larger numbers going about $10 higher. While final sellers are still attempting to get more than $180 from final users, few are winning and most have to accept $170 or even less and quite a lot are happy if a final user gives $160. The $200 level is long gone.

And those street dealers are not doing a lot of business. You can still sell for mobile money, despite the small daily limits, at 4pm, suggesting that business is bad.

Calling the black-market a “market” is imprecise, to put it mildly. Those who imagine it is some sort of near perfect market with perhaps the top five dealers meeting twice a day in a secret room in the Avenues, each with a telephone and a little black flag emblazoned with the skull and crossbones that they lower when they have found the rate that balances buyers and sellers, are living in a dream world.

Even the attempt by a couple of websites to announce daily rates have been blocked by the Reserve Bank and it is now a free for all with huge margins. Even buying at $150 and selling at $170 or more would make a commercial bank’s mouth water, and many try for something worse although finding a mug that will pay more than $180 is near impossible, and even that buyer is totally desperate.

Dealers are actually petrified by the falling black-market rates, that they will be left with a cashbox of US dollars that can be sold for less than they paid.

One smart move by the Reserve Bank was to allow bureaux de change to sell US$50 once a week to walk-in customers. That source has helped those who do need a little foreign currency, basically to buy petrol since the fuel sector is still a sacred cow when it comes to operating in US dollars, to get what they need at a 10 percent mark-up.

The fuel sector, incidentally, is not going to be switching to local currency any time soon. In the last four auctions hardly anything has been allocated for fuel, electricity and gas, and the last two weeks has seen zero allocations for this sector on the main auction, with the previous week seeing around US$87 000, a medium single tanker-load, and nothing the week before that. The SME sector has hardly been more active with less than US9 000 this week, and only just under US$20 000 on October 12. A total of US$116 000 in four weeks on both auctions will not go far, so we all need a few US to buy petrol.

But many motorists and those who need gas for cooking will now be standing in long lines at the bureaux rather than trying to make a deal with someone on a street corner, or phoning their local friendly supplier. 

The bureaux window has probably helped tame the black-market generally. The market is, in fact, very small in quantity although not in numbers. So even a modest injection of cash, and some of those standing in bureaux lines are racing off to sell when they collect, will have a huge effect. Those tiny individual allocations have thus cut demand significantly and, to a lesser degree, pushed up supply.

The Reserve Bank was probably not intending to manipulate the black market, rather to make life easier for everyone else, but its good nature has the same positive effect.

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