Zimbabwe successfully held its second straight foreign currency auction in Harare yesterday that saw the official rate surging only 10.52 percent to settle at 63.7 against the US dollar during an event witnessed by captains of industry and bankers.
Yesterday’s event saw US$16,3 million applications being funded from total bids of US$18,9 million that were submitted, as more private sector players took part while a reasonable rise of the rate to 63.7 to 1 is expected to see the rate start to stabilise.
The highest bid price at yesterday’s auction came in at 92 to US$1, which was slightly lower than last week’s while the lowest bid of $37,8 to US$1 was markedly higher than the 25 to 1 submitted at the inaugural auction the prior week.
Eddie Cross, an economist and member of the Reserve Bank of Zimbabwe monetary policy committee (MPC) who attended the auction, said after a week of market based exchange rate determination, which ensures predictability and formal access to Forex, prices should start to fall gradually.
“We had 316 applications and the total sum allocated was US$16,3 million from bids of US$18,9 million. The weighted average bid rate was ZWL$63,7 and quite a large group of people observed the operation including representatives from the Confederation of Zimbabwe Industries and the Bankers Association of Zimbabwe.
“I think it was same as last week; very open and transparent and I think we are seeing an increasing appetite by private sector to use formal means of securing foreign currency. If it continues like this I think we will see gradual reduction of the open market rates,” Cross noted in an interview.
The auction system, which started last week, replaced the interbank market introduced in February last year and the fixed exchange rate adopted in March this year for certainty of pricing after the outbreak of Covid-19.
The RBZ said last week that banks had nearly a billion dollars’ worth of forex in foreign currency accounts (FCAs) and healthy inflows to sustain the newly introduced forex auction system.
RBZ Governor Dr John Mangudya, said then that the question that had been on the lips of many an observer, was whether the country had adequate supply of foreign currency to feed and sustain the auction, which now determines the official exchange rate.
The expectation is that the weekly Tuesday auction, which had a perfect start, will result in more efficient distribution of foreign currency in the economy among deserving and bonafide importers or users.
The interbank market had not quite worked as expected and eventually the system flopped amid concerns authorities were interfering with the exchange rate.
A fixed rate was then adopted, but lasted for only as long as the margin in between the official and parallel market rates was small, which consequently resulted in drying up of forex on the market as holders of forex withheld the money over claims the rate had become sub-economic, making operations unviable.
It appears authorities may have struck the right codes, subject to other issues that still require attention, after the auction system last week saw bids of US$11,4 million and US$10,4 million being funded on a spread of between $25,4 and $100 against the US dollar.
Dr Mangudya said the inaugural auction was a huge success characterised by transparency, which they intend to maintain in order to ensure a market rate that can then be used in pricing, stabilising the exchange rate, inflation and guiding future foreign currency auctions.
Importantly, Dr Mangudya said the country was receiving healthy inflows of foreign currency running into hundreds of millions of US dollars every month from various sources, including exports, loans from external lenders and remittances enough to sustain the auction.
“The money is there in the market. It’s about efficient utilisation of resources; we have more than US$900 million sitting in FCA accounts. It means holders of those FCAs, when there is stability, will sell their money for their own businesses,” he said.
Dr Mangudya said the central bank was not substituting own sources of hard currency, but supplementing what individual entities may already have while also facilitating the efficient distribution of resources already in or coming into the domestic market.
“We need as a country US$80 million to US$100 million for the businesses in this country excluding fuel and electricity. So, US$80 million to US$100 million includes those with their own foreign currency. So we need to ask, what is the deficit from those without forex?”, he said.
The central bank chief said that on a monthly basis Zimbabwe was exporting US$350 million to US$400 million, getting US$50 million to US$60 million from remittances, US$40 million to US$50 million from artisanal gold miners and US$30 to US$40 million from tobacco exports.
Holders of forex in the country are required to sell their forex for the purpose of funding own operations or must compulsorily sell at the ruling exchange rate the foreign exchange they may not have used after the lapse of a period of 30 days.
Dr Mangudya believes the foreign exchange auction system will stabilise the exchange rate, restore orderly pricing and slow down runaway inflation.
Among key objectives monetary authorities are seeking to achieve through the auction, he said, were restoring confidence in the forex market, stabilising the Zimbabwe dollar exchange rate, stimulating domestic production for self-sufficiency and stabilising prices.
Dr Mangudya said businesses are expected to hold prices or even reduce them while modelling their prices in line with a formal market rate given bids that came showed that the market had been quoting using parallel market rates although not buying forex at such steep exchange rates.
The central bank chief also stated that ordinary consumers had been the biggest victims of a volatile exchange rate, which saw businesses using punitive rates in their forward price model, resulting in prices rising far ahead of low peoples’ incomes.
Amid the absence of systematic foreign exchange price determination, Dr Mangudya said, expectation of higher rates was caused by lack of a market price with most of the inflation being driven by a forward pricing system, which used exchange rates higher than the average.
Dr Mangudya said because the rate that was determined at the auction, being the average, was lower than most of the exchange rates being used by businesses.