New system needs supportive measures

26 Jun, 2020 - 00:06 0 Views
New system needs supportive measures Eddie Cross

eBusiness Weekly

Business Writer
Authorities must put in place additional supportive measures to the newly introduced foreign currency auction trading system for the market to attract foreign currency currently transacting in the parallel market.

Supportive measures are also required to help bring stability and close the gap that currently exists between the official and the alternative (parallel) market exchange rate.

On Tuesday, the Reserve Bank of Zimbabwe commenced use of the foreign currency auction trading system as the official market for foreign currency.

The inaugural forex auction saw 91 percent or US$10,4 million being allotted out of total bids worth US$11,4 million that were presented by banks.

The highest bid was $100 to US$1 and the lowest $25,5 to US$1, giving a weighted average of $57,30.

Market watchers, including Monetary Policy Committee member Eddie Cross, are of the opinion that the first auction system, which allocated 91 percent of the day’s foreign currency requirements, is a positive start that should be commended.

However, given that the auction system has been tried before back in 2004 and was abandoned a year later, there is need to put in place additional supportive measures.

“In my view, these changes represented a real step forward for Zimbabwe in trying to stabilise its currency and restore the economy for real growth,” said Cross in a note seen by Business Weekly on social media.

Cross confirmed authenticity of the note in which he also highlighted that the RBZ will from now onwards stop allocation of hard currency to the private sector for whatever purposes at a discounted rate.

In the past the central bank was subsidising fuel and electricity.

“All liquidation of foreign currency by the RBZ from all sources will now be conducted at the auction rate every Tuesday at the Bank.”

However, Cross pointed out that banks and businesses were cautious and reserved when trying out the new system.

“It is expected that the number of applications and the total quantum that will be handled next week, will be significantly greater.

“This will test the Bank’s ability to meet demand,” Cross reckons.

He said for the new system to be effective, bureau de changes must be in a position to meet demand for small sums of hard currency from the public and the informal sector.

“This includes holiday allowances and school fees as well as medical costs and cross border traders.”

Cross is of the opinion that the recent changes to the Gold Trading system, where the RBZ made an upward review of retention thresholds, will allow market prices to rise to world market levels, reduce smuggling and cut demand for US dollars for trading purposes.

Economist Joseph Mverecha was also in favour of the new system.

“I genuinely think it’s a very good beginning and it will work for the economy. It is a major step in the right direction.”

He however said, for the system to work, all the foreign currency coming into the country must go through the auction system, “so that we have uniform price of foreign currency in the country.”

He said all obligations, both for the public and private sector, must go through the auction system.

“There should be no allocation of foreign currency outside the auction system so that there is no preferential access to foreign currency. We just want one exchange rate for everyone.

Like Cross, Mverechas is of the opinion that bureau de changes must now function optimally.

He suggested that authorities might have to lower capital requirements for bureau de changes “so that we have more and more bureau de changes opening to cater for small amounts and small traders.”

Other market watchers also said the Reserve Bank must guard against high reserve money supply growth.

Reserve money supply grew by more than 300 percent between June 2019 and the second week of June 2020.

Observers believe money supply has been the key driver of currency volatility. Part of the reasons is that interest rates are very low compared to inflation and this has resulted in speculative borrowing.

Cash rich individuals and institutions might still tempt foreign currency earners from the official system if money supply is not curbed through monetary targeting.

The frequency of the auction system from the current once a week could also help in stabilising the rate.

Another supportive measure would be to put in place a social contract through the Tripartite Negotiating Forum (TNF).

Economist John Robertson said the market must take note and support businesses that are going to adjust prices in line with the new exchange rate system.

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