eBusiness Weekly
The productive sector this week gave the Reserve Bank of Zimbabwe (RBZ) a vote of confidence in its foreign currency auction system when bidders kept within the ranges established in the final weeks of last year and marginally eased the rate just 0,37 percent to $82,09.
This shows that the business sectors, even after a long three-week think, reckon that the system is working and working well.
The Reserve Bank justified the confidence by accepting all valid bids, a record volume, and allotting that record sum sought in full. In other words the bank had the money to hand.
This double confidence is important. It ensures businesses can plan and make rational decisions, and the Reserve Bank must have increased confidence it could continue to manage the system when last week it announced slightly lower export retention percentages, thus getting exporters to sell a slightly larger slice of their foreign currency when payments are made.
The marginal easing of the local currency must have been due to some bidders moving slightly up in the band, but the rate given by the weighted average was still almost exactly halfway between the highest and lowest rates seen since the end of August in that gentle fluctuation just visible on the graph.
In one sense there are limits. While monthly inflation has been very low since August, it has not been zero. This means that in real terms the Zimbabwe dollar has strengthened, roughly by that rate of monthly inflation, but there was general agreement when stability was achieved that the US dollar was a tad overpriced, so this stability in rates with small monthly inflation is more of a correction factor than anything else.
There has been speculation occasionally over whether the RBZ can continue to fund the auctions at the required level, despite Government and RBZ assurances that the bank can manage. This might have led to the slighter larger number of higher bids, with importers just wanting to make sure. But in the end all bids were accepted.
In any case the Reserve Bank last week took action at its Monetary Policy Committee meeting to ensure that the auctions could be fully fed.
Exports incentives were trimmed moderately from an average retention of 70 percent to an average retention of 60 percent, pushing the up the slice that exporters must sell at the auction rate as soon as the funds arrive from 30 percent to 40 percent. That small move translates into a surge of 33 percent in the funds the RBZ has available for the auctions, and basically guarantees the productive sectors, basically manufacturing in this case, can continue to grow, allow in new entrants and widen product ranges without any bottlenecks appearing.
The exporters won a concession. Instead of selling any of their retained earnings that they had not used for approved purposes at the auction rate after 60 days they can now keep them as long as they have them.
But the Monetary Policy Committee did not see the change as making much difference. There has been a tendency for net exporters to spend all the retained earnings before the 60-day deadline. It is suspected that some payments, while quite legal and for approved purposes, might not have been absolutely necessary, thus wasting foreign currency.
Exporters, allowed to keep whatever they do not have to sell on arrival or spend on their own businesses, can now keep the rest in a nostro account forever. That should slightly reduce external payments as finance managers put tighter controls on their spending.
Those who sometimes get nervous about the auction rate need to keep a sharp eye on the black market. It has been dead steady for months at the pavement level, making the auction rate with its tiny weekly fluctuations look quite lively in comparison.
In fact, with the liquidity restrictions imposed by the authorities, we have seen some falls in some rates. The pharmaceutical and medical sector has tended to reduce its rate to $100 from the $110 or $120 pertaining even a month or two ago.
This is still above the pavement rate, but this sector, despite its ease of getting currency as a high-priority sector at the auctions, still likes a premium and can just get away with it because first there is still too much of a near monopoly in some areas, and secondly because people will pay more when it is literally a matter of life or death. But obviously limits imposed by market forces are now kicking in.
Already the US dollar cash to Zimbabwe dollar cash street rate is below the rate offered by banks. Admittedly the pavement dealers are more convenient and do not charge commission, but they do buy US notes at $80 when you want Zimbabwe cash, although do better than the official rate if you want digital money.
But the premiums are now so small that supermarkets and others who work totally legally when they accept payment in US dollars, in other words offer the official rate or at least the official bank selling rate, are now seeing a greater flow of US dollar bills.
Although in theory you can make a small profit if you sell on the pavement for mobile money and then buy your groceries with mobile money, the difficulties, the risks and the inconvenience have seen more and more of those who get diaspora remittances just buying with them, instead of changing them, the black-market premium being so low.
The supermarkets, after paying their VAT and duty bills in foreign currency for these payments, are still left with a decent slice to fund some of their more luxury pure consumer goods, which are not priorities on the auctions, but without breaking the law, going to the pavements or acting oddly any more.
In fact the decision to allow fuel companies and service stations to use free funds to import and sell fuel has probably done more to prop up the black market, a result not wanted by the Reserve Bank, since many drivers need to buy black-market dollars to buy fuel.
But on the other hand the growing percentage of diaspora remittances entering the formal economy, either at fuel stations, via the pavements or through direct shop purchases does mean that the Government is getting its share in taxes, and thus meeting its own needs, and bring critical sections of the economy out of the grey areas into the light of day of the formal economy.
And this is all being done by market forces and self-interest, rather than by fiat from the Government and Reserve Bank.
So by the look of it, the authorities are continuing their proactive management, such as with the increase in what must be sold by an exporter when the money arrives, but without touching the free market systems that have now been used to set prices.
