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Pessimism grips forex platform

by Staff reporter
25 Jun 2020 at 16:36hrs | Views
Business wants more "transparency more than promises" on the foreign currency auction system for the platform to succeed as the parallel market continued unabated yesterday, a day after monetary authorities dumped the fixed exchange rate.

The central bank on Tuesday conducted its first auction for foreign exchange designed to help curb the parallel market which has been thriving, but businesses have raised questions about its sustainability.

The new system triggered a spike in prices with some retailers rejecting lower denomination notes as confidence in the local unit dampens.

As prices rise, lower denomination notes become the first casualty.

After Tuesday's auction trading session, the Zimbabwe dollar will be trading at ZWL$57:US$1 for the next seven days, ending the fixed exchange rate of ZWL$25:US$1.

But the greenback is trading higher on the parallel market, hovering between ZWL$80 and ZWL$100. At the inaugural weekly auction, bids amounted to US$11.4m, but RBZ failed to fulfil the required foreign currency transactions. It allotted US$10.3m.

The highest bid was ZWL$100:US$1 and the lowest bid was ZWL$25:US$1.

Zimbabwe National Chamber of Commerce CEO Chris Mugaga told Business Times that business was not reading too much into Tuesday's auction calling for more transparency than promises as was the case when the interbank market was introduced in February last year.

"With the interbank market, we were over promised on transparency. We want more transparency in practice than in promise," Mugaga said.

Experts say the interbank market failed dismally, resulting in companies failing to access foreign currency on the market, forcing them to turn to the thriving black market where premiums are high.

Companies would then pass on the cost to the consumers.

He said the auction "is like a single step on a ladder".

"So, to look too much into Tuesday's auction will be like disregarding other dynamics because it [auction] very much depends on the real sector, external sectors (such as current account) and government sector. Once these collapse, that [forex auction] will be manipulated," Mugaga said.

He said a number of ZNCC members "are yet to come on board" after 92 out of the 7,000 membership participated on Tuesday's auction.

CZI chief economist, Tafadzwa Bandama said it was too early to celebrate the introduction of the auction system.

"As business, we were crying for a platform. We first got the interbank and now we have the auction. But, will it be sustainable? Will businesses be able to access foreign currency?"

Bandama added: "What we want is a credible process. Once we have an invisible hand, it's going to affect transparency."

This is not the first time a foreign exchange auction platform has been in operation in Zimbabwe.

There are growing fears that business will face the same fate as was during the tenure of former Reserve Bank of Zimbabwe governor, Gideon Gono.

Gono introduced foreign currency auction platform, but after years of trying he admitted failure in his war against unrelenting parallel rates and economic decline.

Gono, however, dumped the foreign currency auction floor for a floating system.

The local unit has been on a free-fall against the greenback after Zimbabwe outlawed the use of foreign currencies and re-introduced the Zimbabwe dollar as the sole currency in June last year. The local unit had been abandoned in 2009 after it was decimated by inflation.

Government announced a fixed rate at ZWL$25:US$1 in March after abandoning the managed floating exchange rate system.

The auction which shall be conducted every Tuesday, will be done through a bidding system where bidders shall submit bids for the available foreign currency indicating preferred bid rates.

According to the Reserve Bank of Zimbabwe (RBZ)'s Exchange Control Directive No.RV175/2020, the foreign currency sold at the auction shall only be for settlement for foreign payments.

Sources of foreign currency for the auction market are offshore lines of credit arranged by the Reserve Bank of Zimbabwe, surrender portion of export receipts and liquidation of export receipts after a 30-day retention period.

All foreign currency liquidations shall be effected at the prevailing market rate as determined through the auction system.

Determination of winning bids is done by an adjudication Committee comprising officials from the Ministry of Finance and Economic Development and the RBZ.

Bidders shall submit their bids as individuals, firms or public enterprises through their authorised dealers. Only one bid shall be submitted and should be in the United States dollars.

The auction shall only accept bids for a minimum amount of US$50 000 and a maximum of US$500 000 from each bidder per auction.

Corporates should submit valid ZIMRA tax clearance certificates.

A weighted average rate will be calculated based on allotments and the average rate will be used as the market exchange rate until a new weighted average rate is determined at a subsequent auction.

Foreign currency shall be allotted to the winning bids according to the Import Priority List.

Funds sought from the auction should support the importation of raw materials, machinery and spare parts for local production that directly substitute imports of essential import goods, importation of critical and strategic goods such as basic foodstuff and fuel, health and agrochemicals, importation of packaging material not available in Zimbabwe, mining consumables, goods, and services not available in Zimbabwe for the tourism sector, medical consumables, and fees, payment of services not available in Zimbabwe, commercial vehicles and agricultural equipment, university and college fees, loan repayments, remittance of pension income for non-resident Zimbabweans, disinvestment proceeds and divided remittances, capital remittances for cross border investments, capital remittances from the disposal of local property, funding of offshore credit cards and importation of other consumer goods or services not readily available in Zimbabwe including non-commercial vehicles.

Zimbabwe Tobacco Association president Rodney Ambrose said the sector "welcomed" the introduction of the forex auction system although the rate is lower than the one for retooling which is 1:80.

"For tobacco farmers, now at the peak of their deliveries, a bi-weekly auction would be preferred. A weekly rate will result in speculation with farmers delivering only days after the auction and withholding on days prior to the day of the auction.

We hope that key inputs and capital equipment suppliers were able to access a significant portion of their requirements from the auction system, as this will lower the required re-tooling rate," Ambrose said.

Gold Miners Association of Zimbabwe chief executive Irvine Chinyenze said the forex auction trading system will help the miners to get value for their money.

"It's still early days but we hope that the system will enable miners to get value for their money on the balance that is paid in local currency," Chinyeze said.

Gold miners retain 70% in forex and get 30% in local currency.

Gold and tobacco are the country's largest foreign currency earners and contribute about 55% of the economy's export receipts.

Source - businesstimes

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