Zimbabwe Currency auction system a positive development

How long will we have to wait for foreign currency stability? It’s now three weeks into Zimbabwe’s new foreign currency trading system.

So far three foreign currency auctions have been conducted and a trend is starting to appear.

Of particular note is that, the highest bid has now come down from 100 in the first auction, to 92 in the second, and then 90 in this week’s auction.

On the other hand, the lowest bid has been on an upward trajectory from 25 in the first week to 33 this week.

This means the spread has also narrowed, from a gap of 75 in the first week to 57 the third time around. In fact, on this week’s auction the lowest accepted bid was 55 effectively meaning the spread was narrowed to 35.

The exchange rate, which dropped 129 percent to 57,35 on the first auction, eased 11 percent to 63,74 in the second auction and slowed down again to a fall of 3 percent at this week’s auction to 65,87.

By any standards it’s an encouraging trend. The spread must continue to narrow, while at the same time the rate of currency depreciation slows down further. Better still we must come to a point where it can even strengthen. Why not?

If more independent offers come on board with their reserve prices which are lower than the bids, sellers must lower their reserve prices. That is the ultimate goal. But its early days yet and we need to be patient.

What has also been positive about the new auction system is the success rate for those seeking foreign currency and the auction.

In dollar terms the first auction saw US$10,3 million being allotted out of US$11,4 million bids, in the second auction US$16,32 million was allotted against US$18,95 million bids and this week US$13,60 million was allotted against US$15,87 million bids.

On the first auction the success rate was 92 percent, followed by 86 percent on the second auction and approximately 85.69 percent on the third.

While the success rate seems to be falling, it appears it’s not the fault of the central bank or shortage of foreign currency.

Information gathered showed that the number of rejected bids, this week, at 92, was much higher than the previous auctions.

However, when you hear that 33 of the bids were not allotted because they were too low, you might find the justification. When the weighted average exchange rate for the first two auctions was above 55 it becomes a bit speculative for one to bid at almost half the weighted average exchange rate. Such bids must be seen as out of the market. Expectations are that the market must converge with the bulk of the bids within an acceptable range. The committee in charge of the auction must be commended for this.

Then there was the issue of duplicated bids, where one invoice is used to bid for foreign currency using two different banks. This is an unacceptable behaviour and while the culprits have so far been disqualified, in future there is need to penalise them. If such practices go unpunished, they have the potential to bring the credibility of the auction system into disrepute. The percentage of rejected bids should be very minimal if everyone approaches the auction with their books in order. A higher percentage of rejected bids erodes confidence that the system is working and make it appear there is not enough foreign currency.

Authorised dealers must up their game on this one. The conditions for eligibility are clearly laid out in the circulars and guidance to banks. But there are already suspicion that maybe there is a skills gap in the banking sector. In some instances, there are bankers that are allowing exporters to come to the auction with overdue CD1s or allowing bidders to come to the auction with unacquitted Bills of entry to prove that all the goods previously imported have actually been brought into the country. Then there are some allowing bidders to come to the auction looking for foreign currency, yet their FCA accounts are well funded with foreign currency. Unless the required foreign currency is to supplement what is already there, and there are supporting documents that’s what already held is not enough to close a purchase, there is no reason such bids must find way to the market. The banks need to do their jobs properly and submit clean bids. There are very clear exchange control rules with regards these and banks should not be caught wanting. The auction must be for bonafide invoices and nothing more. In future, both the bidder and the bank must be penalised.

Away from the auction it is also critical that observations are made on how the market is reacting to the new exchange rate. The first thing is that it will be folly to think that overnight the market would accept the new exchange rate regime. On its own the foreign currency auction system still needs to be fine-tuned. While the central bank has opened up for scrutiny even from the media, there are still a lot of grey areas and questions that still remain unanswered. It would require the central bank to be proactive and subject itself to give responses to the frequently asked questions. This can be done through brochures, flyers, and through all forms of media including social media. Coming from a trust deficit background, the central bank will have to do more than just opening up to the media where interests might not be aligned. The central bank must be clear where its interests are, vested or for economic recovery.

Lack of trust in the central bank will lead to other economic players focusing on their own vested interests than of economic recovery.  Questions on how long we will have to wait for a stable Zimbabwe dollar exchange rate to emerge is of enormous concern and it is reflected from both a business and a consumer’s point of view. While the consumer is looking forward to seeing prices coming off, business is still reluctant to do that. Instead, prices are still on an upward trajectory even in US dollar terms. Businesses that had used forward pricing models to determine their Zimbabwe dollar prices are now adjusting their US dollar prices to match their local currency prices using the new exchange rate regime. This stems from the dual prices that is now required. For those that are yet to put in place dual prices, they are still using rates of between 90 and 100 if one wants to pay in foreign currency.

However instead of panic and labelling the auction system as failing, there is need for patience. No new system is ever introduced and works perfect the first time around, worse still one that is coming from a very distorted and undisciplined market. Also where there is human intervention inefficiencies cannot be completely ruled out. The auction system is a positive development and only consistency is key to aligning behaviours. Teething problems must be expected and all authorities can do is to fine tune without pressing panic buttons. Pressures are abounding for Government to start paying salaries and wages in US dollars. Nurses are already on strike over this. The Government is however not doing itself any favours by demanding that some of its services and taxes be paid in US dollars. It leads to people looking for foreign currency instead of the local dollar. Now that we have a foreign currency auction system, the idea should be to make people liquidate their US dollar holdings to pay for Government taxes and services.

If Government insists in charging foreign currency for its services it means business will also have to contend with foreign currency denominated costs some of which are fixed. High fixed costs, and the prevailing low capacity utilisation means the real cost per unit is increasing hence we continue to see prices going up. In other words, business need more than access to foreign currency for prices to start coming down.

The ease of doing business need urgent attention. Business survival must not depend upon satisfying demands for official approvals, licenses, permits and direct Government involvement in activities.

Without improvements in production, the prospects of generating a stable Zimbabwe dollar exchange rate will remain poor and the country-wide determination to get paid in US dollars will grow stronger.

Source: Business Weekly