Zimbabwe Central Bank stabilizes market and prices through foreign exchange auction

Dices cubes to trader. Cubes with the words SELL BUY. Selective focus

The main objective of introducing the Foreign exchange auction is price stability and exchange rate price discovery. Prices have been stable for the past eight weeks or so, and hence optimism. That bids to the auction represents the desired exchange rates by business not RBZ.

Forex transaction in the black market can never be USD $ 700 Million or more, because the country’s exports are around USD $300 Million and that exporters are allowed to retain between 50 – 80 percent of their forex which they don’t take to the black market. Secondly, all funds that come as diaspora remittance are considered as free funds which are kept by the recipients in perpetuity.

Thirdly, that the country’s forex requirement is around $80 Million per month, excluding fuel needs around $50 Million USD per month. The auction has been allotting around $71 Million which is quite reasonable to boost production. The largest firms in this country eg Delta, Varun, Surface and National Foods require $ 500 000 per week. Other firms below that size need around $250 000 per week. The figures being tossed of USD 700 Million or more is likely to be fake news fuelled by those who are not informed. We need to deal with perceptions which should be managed. Let’s look on the positive side of the policy introduction.

The main objective of introducing the Foreign exchange auction is price stability and exchange rate price discovery. Prices have been stable for the past eight weeks or so, and hence optimism. That bids to the auction represents the desired exchange rates by business not RBZ. Forex transaction in the black market can never be USD $700 Million or more, because the country’s exports are around USD $300 Million and that exporters are allowed to retain between 50 – 80 percent of their forex which they don’t take to the black market. Secondly, all funds that come as diaspora remittance are considered as free funds which are kept by the recipients in perpetuity.

Thirdly, that the country’s forex requirement is around $80 Million per month, excluding fuel needs around $50 Million USD per month. The auction has been allotting around $71 Million which is quite reasonable to boost production. The largest firms in this country eg Delta, Varun, Surface and National Foods require $ 500 000 per week. Other firms below that size need around $250 000 per week. The figures being tossed of USD 700 Million or more is likely to be fake news fuelled by those who are not informed. We need to deal with perceptions which should be managed. Let’s look on the positive side of the policy introduction.

This statement is with regards to the introduction of the new foreign exchange auction by the Reserve Bank of Zimbabwe Dr Mangudya. We want to make an analysis on the positive economic outlook after the introduction of the new foreign exchange auction by RBZ. Benefits of the announcement are as follows, the removal of pegged exchange rate. This will allow participation of stakeholders, investors and business community to have a say in the pegging of the exchange rate. With this enlighten, the Governor of Reserve Bank of Zimbabwe must be applauded for such a move because one of the major contributory factor is the auction price discovery. The other advantage is willing seller, willing buyer, you name your price, which then removes the blame tag on institutions like RBZ, and promotes transparency and accountability.

One of the major advantage is the establishment of price stability which the RBZ must be complimented for such a good move. Stability will promote business to produce more and promote investments. Priority list, supporting manufacturing hence productivity. These are clear benefits of the new foreign exchange currency auction. This allows investor’s confidence and boost foreign direct investment (FDI). If the new system works to desired effect, it would help build market confidence, improve access to foreign currency and help stabilize the exchange rate while speculative activity on the black market could subside significantly.

This means it will bring end to market speculation, there has been much hyper and speculation regards to the market prices, and such a move will bring an end to speculation regarding the market prices and stability of prices. The auction system will replace the fixed exchange rate, which was adopted in March this year for certainty of pricing following the outbreak of the deadly coronavirus pandemic. Prior to adoption of the fixed rate system, the market had used the interbank market system since February last year.

Under the introduction of new foreign currency system by RBZ, bids will be submitted, allotted and evaluated by Reserve Bank of Zimbabwe. Business welcomed the move saying business were optimistic if conducted properly. According to the RBZ Governor, Dr Mangudya, the auction system will operate on the Reuters Forex Trading platform, a real-time electronic trading system, which will boost transparency and efficiency in trading of Forex in Zimbabwe. Some of the major achievements of the new foreign exchange rate system is slow down runaway inflation, and it will be a major boost for the agriculture sector, market-driven auction rate, so that earnings and supply prices are in sync. Stimulating production for self-sufficiency and stabilizing prices.

Tinashe Eric Muzamhindo is the Head of Zimbabwe Institute of Strategic Thinking – ZIST, he can be contacted at
tinamuzala@gmail.com