Forex auction: Anchor of economic stability

The foreign currency auction market has induced stability for the past few months as attested to by business leaders and corporate results released in the last few weeks.

The impact has been quite phenomenal, addressing such challenges as price instability and the runaway parallel market rate that had hamstrung the economy.

Very few would have been convinced had someone told them prior to the introduction of the auction system that the situation would change so progressively in such a short space of time.

There were many naysayers who did not give the auction system a chance. They wrote it off as a strategy to stabilise the market and said all they could, but we thank God the Reserve Bank of Zimbabwe did no pay attention to that, but decided to forge ahead.

The parallel exchange rate premium dropped to about 20 percent from 300 percent following the introduction of the new system, reflecting its positive impact on the market.

That drop elicited price stability and injected confidence in the marketplace. It has been testimonies galore as players compete to tell their positive stories subsequently.

“The foreign currency auction system has assisted in the discovery of an appropriate and stable market-based exchange rate for the country.

“While more still needs to be done in this area, the evident stability of the exchange rate, following the introduction of the foreign exchange auction system on June 23, 2020, has minimised distortions in pricing by curtailing speculation and parallel market exchange rate indexation of prices by businesses.

“Consequently, the parallel exchange rate premium has reduced to a tolerable band of up to 20 percent, consistent with experiences in other countries.

“In addition, the establishment of an appropriate market-based exchange rate system has assisted in dampening pressures on inflation,” said RBZ governor Dr John Mangudya in his February 2021 Monetary Policy Statement.

The foreign currency market had presented such a headache in this country before the auction system was introduced. Many were at a loss regarding how the situation would be resolved.

Companies moaned no end about inadequate funds to finance capital projects while the import bill grew bigger by the day it was insatiable, spurred by a huge appetite for all things foreign.

At some point our supermarkets were full of imported water, razor blades, milk, cheese, chocolates, mealie-meal etcetera and very few if any local products, reflecting failure by local firms to capitalise and produce enough to meet local demand.

This compounded an already precarious situation of job losses and company closures as firms failed to raise production capacity while in some instances were elbowed out of the market by relatively cheaper imports at that time.

But all this is now water under the bridge and we can smile again.

Of course the huge import bill, needs to be watched so that more foreign currency can be allocated to productive sectors.

That the bulk of funds is importing such trinkets as imported hair and other such is a discussion for another day, but I am sure we can all do with haircuts if this will help save millions of dollars for allocation to more beneficial needs such as importation of plant and machinery to increase production figures in Graniteside, Msasa, Belmont and other industrial areas countrywide.

The publication of foreign currency allocations this week by the central bank certainly promotes transparency and accountability.

By their nature, auctions need to be transparent to ensure fairness while on the other hand, publishing the names of firms fosters accountability.

Experiences elsewhere show that the foreign currency auction market is quite sustainable although safeguards need to be put in place.

In his research on Foreign currency Auctions and Fixing, author Arto Kovari concludes that foreign exchange auctions have improved the efficiency of foreign exchange allocation relative to the administrative allocation.

However, in order to ensure that the auction markets promote competition and improve the efficiency of foreign exchange allocation, a broad-based access to the tender sessions is needed, together with transparency of the arrangement and an easy access to foreign exchange.

Feldman and Mehra (1993) posit that the auction arrangement facilitates transparency and, therefore, improves the efficiency of allocation.

“Auctioning is thus seen as offering the advantage of simplicity in determining market-based prices . . .”

Such organisations as the Confederation of Zimbabwe Industries have been clamouring for transparency and this first step by the central bank appears quite helpful.

Identifying the firms allocated and the quantum, thereof, inspires a sense of responsibility and accountability that promotes efficient use of resources. Putting the firms in the public domain should induce fear for those that have been or were contemplating dabbling in the parallel market.

Early this month RBZ suspended 12 companies from participating on the hard currency market as investigations into possible arbitrage are being undertaken.

That these firms are believed to be channelling some of their foreign currency allocations to the parallel market is quite unfortunate and irresponsible.

These corporate citizens should know better. Although seemingly lucrative in terms of getting more for your dollar, parallel markets have proved detrimental to the economy and should thus be despised in every sense of the word.

The auction market is meant to ensure a stable supply of foreign currency at the most appropriate rate hence the need to safeguard it jealously. The central bank should come hard on mischievous firms playing games with resources. We hope the authorities move expeditiously to put in place stringent regulations to deal with the errant firms.

Dr Mangudya revealed recently that a draft Statutory Instrument to deal ruthlessly with culprits has already been tabled. The bank presently can only suspend firms from trading for two weeks, but a harsher penalty of a hefty fine in United States dollars would be more punitive.

We are made to understand that the bank’s Financial Intelligence Unit is maintaining a close eye on how firms are allocating funds received. Such policing is critical. We have come from a really bad patch pertaining to foreign currency scarcity and experienced the wrath of the parallel market.

Anyone or anything that seeks to feed that market while destroying the official system, must be dealt with without compromise.

Many have argued that Zimbabwe produces enough foreign currency, but the devil has been in the misappropriation of the scarce resources through leakages to the parallel market. With the decent auction system in place we should expect satisfactory allocation. But be that as it may, local firms need to produce more for the export market.

The potential is there, bolstered by the Africa Continental Tree Trade Area that has opened up markets that Zimbabwe should compete for and benefit from.

ZimTrade and other organisations have presented potential export products and the markets to which these can be exported.

Recently I watched a ZTV programme in which women in rural areas were producing ginger  and garlic for the export market. Such initiatives can boost foreign currency earnings hence a better balance of payment position.

Furthermore, Zimbabwe is blessed with more than 40 minerals including 19 of the world’s rare earth minerals from which large sums of foreign currency can be earned to boost economic growth. Tourism presents big opportunities too, among many such that can be exploited to earn the country the much-needed foreign currency.

The roadmap to Vision 2030 has been laid out and all that remains is for all of us to give of our best. A stable foreign currency system opens doors for foreign direct investment through a healthy Gross National Product —The total value of all finished goods and services produced by a country’s citizens in a given financial year irrespective of their location. This is indicative of a good market.

Furthermore, the auction system is financed largely from export proceeds hence increased exports will result in a more robust market. Companies, both small and large can then receive adequate supplies to meet their raw material and equipment needs.

The benefits accruing from such a scenario are obvious. Most of all, a functional foreign currency auction system anchors the inflation battle. The resulting price stability, among other economic benefits are critical for economic growth.

In God I trust!

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