The Reserve Bank of Zimbabwe (RBZ)’s weekly foreign exchange auction system received a major confidence booster this Tuesday following the first ever participation of two private sector giants that sold their funds on the forex trading platform introduced three weeks ago.
Since the inception of the auction system, which replaced the interbank rate introduced early last year and the fixed rate regime adopted in March this year, the RBZ has been single-handedly funding bids from importers as private players and individuals sought to understand how the system works before coming in.
Both the interbank and the fixed rate regime were abandoned after failing to gain the confidence of the market amid suspicion authorities were manipulating the rate of the former while the fixed rate system became redundant and economically unsustainable once the gap with open market rates widened.
Captains of industry this week said that while it was still too early to judge, it was clear the auction had started fairly well while its success and sustainability will be determined by the extent to which authorities ensure transparency and allow forces of demand and supply to determine the rate.
Without predictable access to foreign currency and a systematic way of determining the exchange rate, most businesses were now using forwarding pricing by quoting prices well above steep black market rates in order to hedge against expected and sudden exchange rate movements.
And amid limited access to rightly priced hard currency, businesses turned to the alternative market for forex that uses high and speculative rates, which resulted in exchange rate volatility and sustained increases of prices and inflation.
RBZ Governor Dr John Mangudya, is on record saying that following the introduction of the auction system, which now establishes a formal market exchange rate, it was expected that businesses will start quoting prices using the right ruling rate; the average of deals completed on the auction.
This has already started happening in the pricing of bread and fuel, which receive foreign currency for imports at the auction determined market rate, which has seen bread prices come down.
The indication are other players after exhausting goods procured using expensive money, are likely going to reduce their prices as the foreign currency action gains traction.
The auction has since established a market determined exchange rate, the weighted average of auction deals, which has drifted from $57.36 in the first week, to $63.74 last week (10 percent) and now to $65.80 (3.2 percentage points), against a unit of the United States dollar.
At this week’s auction, the number of funding applications submitted dropped to 264 against 316 received for the second weekly auction, but was still well above the just over 90 in the first auction.
The total value of bids also fell from roughly US$18 million to US$15.8 million, while the successful bids went down to US$13.6 million from about US$16 million last week.
Because the majority of private holders of forex players have stayed away, despite revelation by the central bank that private entities and individuals hold over US$900 million in foreign currency accounts (FCAs), the Reserve Bank had to fund all bids.
This is despite the fact that the RBZ has a standing rule that requires holders of foreign currency to either utilise their money within 30 days after which they are compelled to liquidate the funds on the official market at the going rate.
Private Sector Joins the Party
Eddie Cross, a member of the RBZ monetary policy committee, said they were happy with how the auction system had performed thus far given that all successful bids had been fully funded, with priority placed on essentials such raw materials.
“I think the auction so far has worked just fine; I think some more people (exporters) are coming to the party to sell their foreign currency, yesterday (Tuesday) we had two organisations putting their foreign currency on the table; that was the first time,” he said.
Cross, who is a decorated economist, dismissed claims that approved applications were not being funded stressing that all successful bids had been settled within the prescribed period of seven days from the day of auction, a standing condition agreed with the RBZ.
“For this week’s auction, all successful bids should be paid by Monday. In the first auction we were able to settle all successful bids within two days. I am not sure about last week but I think we were able to do the same thing. If there are any cases like that, the problem we may be having is that commercial banks are not crediting clients with the money in time,” Cross said.
He said they wanted to see more private players, especially exporters, coming on to the action system to sell their money. He pointed out that the two who took part at this week’s auction were able to sell their funds amounting to US$500 000 at fairly good rates of 70 and 90 to 1.
“We are waiting for the exporters to come in and I think this coming week we will start to see more players, but we have funded 100 percent of productive sector requests so far. I have been surprised that we have not had that many applications; yesterday we had 264, previously we had 316 and a week before that there were about a 100,” he said.
Cross said the bank had implored private players with foreign currency and willing to participate on the market to come on board and trade the funds at their own preferred exchange rate, which the central bank believes will improve efficiency and sustainability of the system.
Zimbabwe National Chamber of Commerce (ZNCC) chief executive Takunda Mugaga, said everyone still wants to see the sincerity of authorities in allowing free market forces to work at the auction and if it will not drift into a managed float.
“If demand and supply are allowed to operate, certainly the private sector will be willing to participate. So prospects on private sector participation are quite promising and it’s too early to discount the auction system.
“We are very hopeful that it is going to be a very effective and efficient mechanism of trading forex,” he said.
Points to Note
1) Companies applications are done through banks
2) Banks prohibited to process applications for firms with compliance issues
3) Compliances issues include;
a)outstanding Zimra issues
b)Outstanding CD1 submissions for exporters
c) Un acquitted Bills of Entry for importers
d)Companies with foreign currency balances in their bank accounts