Economists applaud first Zimbabwe currency auction in 16 years

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ECONOMIC analysts have described the new official exchange rate as the genesis for the economy to make corrective action towards addressing structural challenges currently bedevilling the country, following the adoption of a foreign currency auction system by the Reserve Bank of Zimbabwe (RBZ).

The inaugural foreign exchange auction had a flying start yesterday with applications worth US$10.35 million being allotted from bids for US$11.4 million, with the weighted average, effectively the official exchange rate until next week’s auction, being $57.3582:US$1.

Bidders offered rates at this auction run by RBZ ranging from a low of $25.50, a whisker above the frozen and now defunct interbank rate prevailing until the auction, to a high of $100, a rate even above the black market rate, for US$1.

Under auction rules successful bidders have to pay the rate they offer, so the high bidder paid almost twice as much for their US dollars as the weighted average and possibly four times as much as a successful low bidder. It is expected that as the auction system gets into its stride the gap between high and low bids will become far narrower. Sellers of foreign currency are all paid out at the weighted average.

For the economy to sustain its development aspirations it needs an exchange rate that represents and reflects economic realities on the ground as such this is the basis for economists in welcoming the latest developments in that it is trying to eliminate arbitrage opportunities as well as rent seeking behaviors that were being caused by the fixed exchange rate against market conditions.

Economic Analyst, Kipson Gundani believes the foreign exchange auction system will give the economy enough leverage to spearhead various micro and macro-economic activities.

“I am glad that finally authorities realised that the fixed exchange rate regime was doing more harm to the economy hence the adoption of a more flexible and sustainable forex exchange determination system,” he said.

“We expect that the new system will give the country enough breathing space in terms of having a correct exchange rate however we will see prices of goods and services going up in the short term especially those that were being subsidized like fuel.

Dr Prosper Chitambara, another economic analyst said the auction-based system of exchange rate brings with it many benefits in trying to deal with the macroeconomic aspects of Zimbabwe though it will carry some negative impact in the short to medium term.

“This is a first step in the right direction in dealing with many structural anomalies that the country has been experiencing of late, we just hope foreign currency earners will be incentivised to produce more knowing that they will get fair value to their investments,” said Dr Chatambura.

As the auction system continues while the “ceteris paribus” concept holds hopes are that the economy will determine the true value of its exchange rate that is stable.