The Reserve Bank of Zimbabwe (RBZ) has ordered banks to freeze utilisation of funds that foreign currency seekers would have used to bid for forex on the auction system after it emerged some bidders were spending the money before the auction day.
This has resulted in sharp increase in rejected bids since the central bank last month directed that all bids would be submitted through bidders’ respective banks four days before the auction date to allow the RBZ enough time to sift through the bids.
There had been an increase in applications for foreign currency on the auction system, prompting adjustments of the timelines. The auction system was introduced in June last year in what authorities said was meant to efficiently distribute forex.
Since the change of the bidding rules, rejected bids have sharply increased. Bids rejected at last week’s auction were 586 representing a 49,87 percent increase from a week earlier.
Despite dropping this week to 547, the figure remains high compared with average rejections before the change of the bidding rules.
Speaking to Business Weekly, monetary policy committee member (MPC) Professor Ashok Chakravarti said the high rejection of forex bids was due to companies submitting bids not backed by enough bank balances on the day of the auction.
Market speculation had become rife that the increase in rejected bids was deliberate to limit the number of beneficiaries.
While the bidders are submitting bids with their accounts adequately funded, some are spending the money before the auction.
“The situation currently going on is that a bidder might have funds in their account enough to fund the bid on the day of submission, but the banks are not monitoring the accounts to block use of funds to below the amount the account holder bids at the auction,” said Chakravarti .
“The Exchange Control has found out that banks are allowing their clients to use funds used to bid for the auction to the extent that when the day of the auction arrives, the bank balance does not match the bid, hence the rejections,” he added.
Chakravarti said the RBZ had since advised banks to block bid funds.
Chakravarti added that “This now shows lack of due diligence by the banks, and customers trying to exploit the system. Sometimes you should look at business behaviour and stop pointing fingers at the authorities. As private sector, they should also complement the efforts of authorities and not always want to be whipped into line.”
While the auction system has led to significant improvement in access to foreign currency, it was taking too long for successful bidders to receive their allocations.
Market experts say while the decision to freeze funds used to bid for forex was a noble idea, it must be accompanied by spot disbursements of the foreign currency for successful bids.
The central bank is however now current on foreign currency auction allotments and has cleared the nearly USS$200 million backlog, according to Finance and Economic Development Minister Professor Mthuli Ncube.
Amounts allocated through successive auctions increased significantly for both the main and small-medium enterprises auctions, bringing the total allotments to US$2,34 billion at November 2, 2021.
Weekly allotments for the main auction increased to US$34,49 million, between July and November 2021, from a weekly average of US$21.95 million in 2020. Similarly, the average weekly allotments for the small and medium enterprises auction also increased from US$1.53 million in 2020 to US$9.90 million during the same period in 2021, the Treasury said.
The auction system continues to support the productive sectors of the economy with more than 70 percent of the allocations going towards the critical sectors and has, therefore, significantly contributed to capacity utilization across the board.
As at November 2, 2021, 42 percent of the total allotments financed raw materials, while 21 percent funded capital goods such as machinery and equipment and 5 percent went into fuel, electricity, and gas. In terms of companies, those in the manufacturing sector accounted for 17 out of the top 20 auction beneficiaries.
This week, the Zimbabwean dollar weakened to $105.6896 against the US dollar, although the change was marginal, and after a week of appreciation, it has returned southwards as the parallel market nears $200.00 per dollar. This week’s exchange rate is from a prior week’s rate of US$1: $105.6684, representing a marginal 0.03 percent change.
The auction system remains the major source of foreign exchange with more than 5,958 entities having accessed forex through the Main Auction and the SMEs Auction.