By now, under the new rules of the Reserve Bank of Zimbabwe, everyone planning to bid on next week’s foreign exchange auction must have handed in their bids and supporting documents with just one day to have absorbed the signals from this week’s auction before holding their finger up to the wind and making a guess as to what price to bid for a US dollar.
The new rule of submitting bids to banks four business days before the auction and then the banks having to submit these to the Reserve Bank three days before the auction obviously makes life that little more difficult and cuts back seriously on the time bidders might need to ask around and consult their tame analysts over what the trends are and where they should place their bids.
In one sense it is an indictment on both some bidders and some banks. Under the rules, banks are supposed to know their customer very well and so be able to have done the required checking very fast, from a position of knowledge, over whether the bid was valid. The fact that just under 14 percent of bids on this week’s main auction were rejected as being contrary to the rules suggests first that banks were not doing this efficiently and secondly that some bidders were really taking a chance.
The fact that the rejection rate on the SME auction was a lot lower, just 3,5 percent, suggests that it was the bidders who were largely not following rules, rather than the banks deliberately submitting dubious bids when they knew better. Presumably a bank is more likely to spend time getting to know a big customer than to go into the ins and outs of the business dealings of a smaller customer.
Considering that the gnomes inhabiting the many floors of the Reserve Bank tower have access to all bank accounts and customs declarations, it now seems likely that all bids are going to put through an extensive examination to see if they really meet the rules, and if the goods being ordered are actually on the priority list and are required.
Again it is likely that some who might be using their liquidity to build up stocks of raw materials, or advance orders for machinery and equipment, might be treated more distantly. The rapid decline in the value of the Zimbabwe dollar on the auctions over the last six weeks, although now slowing, obviously provides an incentive to order well in advance, simply to lock in a lower Zimbabwe dollar price for the goods on order.
This can reinforce the early order trend that many must have resorted to with the delays that were experienced in getting the actual cash after the allotments were made. The double combination probably puts more strain on the Reserve Bank that it anticipated.
These were legal and in many ways rational measures by importers. The Reserve Bank also believes that there are importers who cheat. Cheating can be everything from over-invoicing, ordering stuff for resale at fancy mark-ups to third parties, and things that probably require a subtle and complex near criminal mind to think up.
The Reserve Bank has said it wants more time to consider what is being imported and what is essential, which is fine as far as it goes, although there has been no suggestion yet that they will decline a bid for a priority item that meets all the rules. However, the option of managing the priority lists does exist if they want to be careful. On a more positive note it will help ensure that there is adequate foreign exchange for sale on the auction.
Everyone will be looking very hard on next week’s auction results to see what percentage of bids are rejected and will be trying to estimate whose bids were turned down and why.
This week’s auction did provide a great deal of hope that exchange rates might be stabilising. The Zimbabwe dollar using the weighted average only declined by bust under 0,96 percent, its smallest fall for seven weeks.
Bidders were more accurate in their decisions of where to bid, with the top bid on both auctions falling from $120 to $115, showing that those top bids last week were seriously out of kilter and a result of panic.
The bottom bids were in some ways more interesting. On the SME auction at least one successful bidder went to $96, the minimum bid receiving an allotment last week, and managed to make the allotment list.
The bottom bidder on the main auction was less daring, choosing $97,14, a very odd figure when you come to think about it. That bidder must have assumed that the cut-off for allotments would continue to rise, but those 14c are a peculiar choice when adding just a little bit more.
The other point to consider, when we look at 101 out of 732 bids being rejected on this auction, is that the Reserve Bank was being considerably more careful when examining bids and managed to reject the bargain seekers on other grounds besides bidding too low. The fact that they then switched to the four-day rule could reinforce that interpretation, that they want to check everyone out far more carefully. Almost US$46 million, a high figure on recent weeks, was allotted.
But US$6 million of accepted bids were not allotted, suggesting there is something odd in the table published or that the Reserve Bank now has a way of distinguishing an acceptable bid at an acceptable price but with the bidder not being regarded as essential enough to get money, or at least not all the money asked for. This would introduce a new category of bidders at the auctions.
But the weekly reports have always made it clear that some bids were partially allocated, although in most cases it was apparent that all accepted bids above the cut-off were allocated in full. This could also be a pointer as to what we can now expect with that four-day rule. On the SME auction all accepted bids were allocated in full.
In any case on the main auction the bid band fell from almost 25 percent last week, a huge gap and reflective of the uncertainty and unease in business circles, down to 17,9 percent, still huge by historical standards but a sign that bidders and their bankers are starting to get the hang of the signals being sent out by the Reserve Bank.
The other interesting point is that importers of fuel, electricity and gas managed to get total allotments of just over US$93 000, a third of this on the SME auction, but that was almost as much as had been allocated on this section over the past four weeks. It still does not mean that there will be much Zimbabwe dollar petrol for sale, but does suggest that things are starting to move towards more normal business decisions.
The complaint that the Reserve Bank is not doing enough to keep the business bidders fully informed as to the bank’s policies still applies. Bidders are still having to work in at least very dim light even if they are not totally in the dark, and the rumours and comments in many cases move out of the rational world into near conspiracy theories.
Some indication of how partial allotments are decided on, as well as on how the Reserve Bank sets cut-off points for allotments, would be useful.
As we, and many others, have previously commented, the auction system is not a perfect allocation system or a perfect rate setter because only 40 percent of export earnings are available for sale with the expected interbank market for some of the rest still rather small. The system of allowing quite high percentages for retention by exporters does impose a distortion and in effect creates two unconnected business systems when it comes to paying for imports. The reasons were good for the double system, but in a perfect economy there would be only one system as there is in most countries, with the exchange rate floating.