Zim needs US$2,5bn to dump forex auction

09 Apr, 2021 - 00:04 0 Views
Zim needs US$2,5bn to dump forex auction Dr Mangudya

eBusiness Weekly

Business Writer 

Zimbabwe will continue with the auction system as a primary platform for exchange rate discovery and trading of foreign currency for as long as it does not have sufficient reserves — at least USU2,5 billion — to cover six months of imports, a senior official has revealed.

The Reserve Bank of Zimbabwe (RBZ) introduced the auction system as a platform for trading foreign currency in June last year, bringing some sense of stability to both the exchange rate and inflation.

While the exchange rate initially raced from 25 to 83 Zimbabwe dollars against the United State dollar, it has largely remained stable for more than nine months and is currently trading at 84,40 to the greenback.

On the other hand, inflation has slowed from a peak of 837 percent in June last year to the March 2021 inflation rate of 240,55 percent.

The month-on-month inflation rate has since slowed from a peak of 35.5 percent peak in July 2020 to the March 2021 low of 2.3 percent.

Authorities and some observers have credited this to the foreign currency trading auction system.

But with the premium between the official exchange rate and the parallel market exchange rate widening to as high as 40 percent, there are growing calls that the auction system has run its course and ought to be replaced by a free market system.

One of the reasons the premium seems to be growing is that the auction system is not inclusive as it uses an import priority list. The use of the import priority list has not only completely excluded some economic players, but has also meant some players are not accessing sufficient foreign currency requirements.  

On the auction system, bids, which are not eligible in terms of the set priority list, are disqualified while some bids are allotted on a pro-rata basis to conform with the import priority list.

Such a scenario has led to calls that the auction system is not sustainable and is like a boiling pot with a lid on it.

RBZ governor Dr John Mangudya has, however, defended the continued use of the auction system saying the country currently does not have sufficient foreign currency reserves to run a free market foreign currency trading system.

Speaking at a virtual meeting hosted by the Zimbabwe Economic Society on Wednesday, Dr Mangudya said for that to happen, the country must have at least six months of import cover. 

Using last year’s import bill of US$4.9 billion, it means the country must have in its reserves not less than US$2.5 billion. This means the country is a long way from introducing a free market foreign currency trading system as its nostro balances, which are not reserves in the true sense, are less than US$1.5 billion. 

“When that happens definitely we will not continue to have an auction system because the resources will be sufficient enough. For now, we want to sustain the auction, but going forward, when resources are in such manner that our import cover, for our net international reserves is six months, then we can now talk about interbank foreign currency system.

“As long as that fundamental principle is not there we are going to continue with our auction system but when we have six months of reserves we will therefore go back to the free market situation which for now as I said due to the geopolitical situation you don’t want to throw the baby with the bathing water,” Dr Mangudya explained.

Currency appreciation or stability is about supply and demand, and currently, there is more demand than supply, Dr Mangudya said.

He said Zimbabwe has not been able to quickly move to a free market foreign currency trading system because certain geopolitical factors have meant the country has not been able to access international capital to support its local currency.

Hoping on the SDRs

Dr Mangudya, however, expressed hope that the country might be able to access international support in form of Special Drawing Rights (SDRs).

World financial leaders are this week expected to back a US$650 billion new allocation of the International Monetary Fund’s Special Drawing Rights (SDR) to help countries cope with the pandemic and its economic fallout.

The SDR payments are separate from IMF programme financing, which comes with strict policy conditions, and goes into a country’s foreign exchange reserves. To turn SDRs into hard currency, an IMF member must reach an agreement with another member to buy the SDRs.

 In 2009, Zimbabwe received US$400 million in IMF special drawing rights from a total of US$250 billion global agreement to bolster the reserves of the IMF’s 186 member countries in the wake of the worldwide financial crisis which had started in 2008. The Covid-19 pandemic has brought another crisis.

With the new U.S. administration backing the move, there is now broad agreement among IMF members to bolster the Fund’s emergency reserves and a deal this week will pave the way for the fresh money being available from August.

The new allocation will benefit countries struggling most from the pandemic as roughly 42 percent of the new funds will go to the world’s poorest countries, including Zimbabwe.

Dr Mangudya said the country’s authorities are hopeful that in view of the current discussions within the international financial institutions about the SDRs, Zimbabwe will be able to get some resources that will go a long way in easing its economic situation.

‘Zimbabwe will not be left behind under these circumstances and those are some of the resources that the country will require, patient capital to ensure that we continue to deepen our reforms or deepen our growth of the economy.

“And when that happens definitely the currency can stabilise and appreciate. Right now we are in search of stabilisation. But when more resources come in, definitely the currency will stabilise and gravitate towards appreciation,” said Dr Mangudya.

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