eBusiness Weekly
BusinessWeekly
Last Word
The foreign currency auctions run by the Reserve Bank of Zimbabwe set the exchange rate through a market mechanism whereby importers submit bids and so set the rate at which they are prepared to buy.
The Reserve Bank does not set the rate by fiat, nor is it allowed to manipulate the system, but it can give signals to the market and it seems that more distinct signals are now being given again that bargains are not available.
At the very beginning of the auction system, and indeed for the first two months, it had to give signals to move the market towards a narrow range of bids. The first auction saw bids ranging from $25 to $100 for a single US dollar, but there was a discernible bulge of bids.
Pure market forces would correct the top bid and bring it down closer to the bulge. No one was going to persist in paying far more than others to buy foreign currency. We need to remember that a successful bidder pays the price they bid, so if they bid over the weighted average, they pay more than they needed to have done if they estimated the actual average more accurately, and if they bid less but still made the cut they won a bargain.
To curb the problem of very low bids, the obvious strategy was to limit the amount of currency available for sale, so cutting out the bids that were way below the emerging bulge of mid-range bids.
The dual process of using market forces to modify the top bid and signals to modify the bottom bid, saw the weighted average move upwards steadily during the fairly high monthly inflation we still had in July and August, and which needs to be compensated for, while the range between top and bottom bids narrowed quickly and sharply.
By the last auction in August, with monthly inflation now well below 5 percent, a different set of signals was given. The Reserve Bank for the next four and half months ensured that there was enough foreign currency to allot to meet all valid bids within the new narrow range that bidders had moved into.
In fact, almost all bidders appeared to be bidding far more narrowly than the upper and lower limits suggested, because weekly movements fell to less than 1 percent and then fell further to very small fractions of 1 percent. There was the curious result of several weeks of marginal strengthening of the Zimbabwe dollar, followed by several weeks of marginal weakening, followed by a slightly bumpier ride for a few more weeks.
But all valid bids were allotted, so everyone kept within the tight range.
This week that changed.
The latest auction saw all bids below $82 not allotted. This is just below the rate set last week, when the weighted average came in at around $82,08. The average, even without all those under $82 bids, still rose only marginally to $82,67, confirming the analyses that most bidders actually put their bids in a very tight range around the previous bid.
What will though intrigue many is why the return of the cut off when so little had changed.
For a start the volume of valid bids, that is from bidders who had all their paperwork present and correct and were bidding for funds to pay bills for goods and services on the priority list, hit a new record, close on US$40 million on both auctions. Admittedly this was only the second auction after the three-week Christmas break, when a lot of importers of essential goods would have resumed normal business, but it was also the second week.
More interestingly, it was well into the resumed Level Four lockdown announced at the start of January. A lockdown of this level should depress both disposable incomes, at least on average, and depress demand, again on average.
The counter-argument is that the auctions feed the priority areas, which are less likely to be depressed when demand and consumer spending fall; people might postpone buying a new shirt but will not postpone buying food.
But still, it was a significant jump in foreign currency demand and that could well have triggered a reaction that some major importers were looking at stocking up on imported inputs, perhaps in fear that there could be a weakening of the local currency, or perhaps just to convert their Zimbabwe dollar balances to raw materials and spares sitting in a warehouse.
The other factor to consider is the actual exchange rate. When it stabilised, at just over $83, there were indications that it had done so at too high a level and that the fundamentals suggested that the US dollar was overpriced.
AT the same time, while monthly inflation crashed, it did tick along at around 4 percent for the next four months, low by the standards of the last few years and very low by the standards of the period when the Zimbabwean economy was finally allowing all the money creation of the First Republic to bubble to the surface. But although low by those standards, it was still significant and coupled with a stable exchange rate suggests that the Zimbabwe dollar, in real terms, firmed more than 15 percent.
A good chunk of that monthly inflation did not come from private sector price rises. It came from the delayed price rises in the regulated sectors that had not been tracking black market exchange rates in the first seven months of the year as other sectors had been doing. So we only saw the rises in electricity tariffs, most of the bus fare increases, some fuel price increases from the rise in diesel tax, water charges, rates and the like after the stability in exchange rates.
So it was not a result of fundamental changes in the economy, but although present was the last spurt of the inflationary spiral seen earlier last year. But it still had to be brought to account.
But just recently we have seen further new maximum fuel prices, a sector largely built on free funds rather than auction funds. Those price rises come from higher oil prices as the producers make strenuous efforts to climb out of the near collapse in oil markets of last year, but they still will add pressure to our pricing models. This is an external factor, something new.
At some stage the effective weekly and monthly revaluation of the Zimbabwe dollar, done drip by drip, was likely to end and the exchange rate was then more likely to start following the monthly inflation rates, perhaps a little under one percent a week. And that is what happened on Tuesday.
It needs to be remembered that all foreign currency on auction arises, in the end, from exports. The Reserve Bank was taking a 30 percent share of exports through compulsory purchase, at auction rate, of export earnings as they arrived in Zimbabwe. It is now taking 40 percent, to ensure that the auctions remain funded, but exporters cannot be expected to subsidise the importers.
At some stage, for fairness and economic stability, we should have expected the exchange rate to move in a direction that maintained value for exporters. By the look of it, we may well have reached this stage. Certainly importers were starting to feel that this might be the case, hence the attempt to liquidate their Zimbabwe dollar holdings and convert these to goods in a warehouse and hence the signal that this was not a possibility.
There will be one weird economic statistic coming up. Although the annual inflation rate is, at present, a meaningless statistic since the monthly rates form a discontinuous function with the August figure from last year being the switch point, far too many people still regard it as divine revelation.
By some oddity the January figure of last year as a very low discontinuity on the graph, so there will be this one month where the monthly figure this year will be higher than the same month last year, and consequently a small increase in annual inflation figures. If everyone ignored annual figures until like is compared to like, the auction world with the auction world, this would not be a problem; but expect some headlines from the non-mathematical.
But what appears to be the signal coming from the auctions is two-fold. First importers should not seek sudden large jumps in allotments to stock-up, but should continue their steady buying to meet their requirements.
And secondly there now appears to be a belief by all parties and markets that the Zimbabwe dollar has reached the limits of its effective revaluation, found its correct value and could now well be tracking purchasing power parities.
