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'US$1 billion to back Zimbabwe forex auction'

by Staff reporter
28 Jun 2020 at 07:11hrs | Views
Local banks have $1 billion in foreign currency accounts (FCAs) while the country has healthy inflows to sustain the newly introduced forex auction system that replaced the interbank with effect from Tuesday this week.

Reserve Bank of Zimbabwe (RBZ) Governor Dr  John Mangudya said in an interview that the question that has been on the lips of many an observer, was fear that the country may not have adequate supply of foreign currency to feed and sustain the auction system, which must determine the official exchange rate.

The expectation has been that the weekly Tuesday auction system, which took off to a perfect start after most of the bids that were submitted were allotted, will result in more efficient distribution of foreign currency in the economy among deserving and bonafide importers. The central bank had tinkered the interbank market since its introduction in February last year. A fixed rate was then adopted in March to stabilise prices after the Covid-19 outbreak.

It appears authorities may have struck the right codes, subject to other issues that still require attention, after they adopted an auction system effective Tuesday that attracted bids of US$11,4 million resulting in a total of US$10,4 million being funded from a bid spread of $25,4 and $100 to US$1.

But analysts say more should done to control excess liquidity, which may continue to find its way on to the parallel market for purposes of buying forex and potentially maintain pressure on the unofficial rate in a way that destabilises the market.

Dr Mangudya said the inaugural auction was a huge success characterised by transparency, which they intend to maintain to ensure a market rate is used for pricing, stabilising the rate, inflation and guiding future foreign currency auctions.

"The auction was super transparent and we want to continue with this auction on a transparent basis, we do not want any abuse of this 'super transparent system' because we benefit nothing out of that since the market has spoken, and we implemented what the market wanted," he said.

But more importantly, Dr Mangudya said the country was receiving healthy inflows of foreign currency running into hundreds of millions every month from various sources, including exports, loans from external lenders and remittances from Zimbabweans living abroad.

"The money is there in the market and sources we normally deal with. It's about efficient utilization of resources; we have more than US$900 million sitting in FCA accounts. It means holders of those FCAs, when there is stability, they will sell their money for their own businesses," he said.

Dr Mangudya said the central bank was not substituting own sources of hard currency, but supplementing what individual entities may already have while also facilitating the efficient distribution of the foreign currency already in or coming into the domestic market.

"We need as a country US$80 million to US$100 million for the businesses in this country excluding fuel and electricity. So, US$80 million to US$100 million includes those with their own foreign currency. So we need to ask, what is the deficit from those without forex?"

The central bank chief said on a monthly basis Zimbabwe was exporting US$350 million to US$400 million, getting US$50 million to US$60 million from remittances, US$40 million to US$50 million from artisanal gold miners and US$30 to US$40 million from tobacco exports.

Tied to the auction market, holders of forex in the country are required to sell their forex for the purpose of funding their own operations or must compulsorily sell at the ruling exchange rate the foreign exchange they may not have used after the lapse of a period of 30 days.

Dr Mangudya believes the foreign exchange auction system will stabilise the exchange rate, restore orderly pricing and slow down runaway inflation. Among key objectives monetary authorities are seeking to achieve through the auction, he said, were restoring confidence in the forex market, stabilising the Zimbabwe dollar exchange rate, stimulating domestic production for self-sufficiency and stabilizing prices.

Due to an unstable Zimbabwe dollar exchange rate, prices of goods and services sky-rocketed with inflation soaring from a lowly 5,39 percent in October 2018 to 786 percent by May this year.

The central bank chief also stated that ordinary consumers had been the biggest victims of a volatile exchange rate, which saw businesses using punitive rates in their forward price modelling, resulting in prices rising far ahead of most low income peoples' incomes.

"What businesses were doing was pass on the burden to customers. No business entity was buying forex at such a high exchange rate, but the consumer was the one carrying the cost on behalf of businesses," he said.

"The first thing is that we do not expect the exchange rate to continue to go up because there now is a formal market for foreign exchange," Dr Mangudya said.

Amid the absence of systematic foreign exchange price determination, Dr Mangudya said, expectation of higher rates was caused by lack of a market price with most of the inflation being driven by a forward pricing system, which used exchange rates higher than the average.

"At best now, business should hold prices until next week while you go again to the auction to look for foreign currency required for your business at $57 to US$1 or whatever rate is going to be. It means with exchange rate stability we are going to flatten inflation carve," he said.

Dr Mangudya said because the rate that was determined at the auction, being the average, was lower than most of the exchange rates being used by businesses.

"Therefore we expect maturity from business to serve their customers with integrity because consumers were the ones bearing the burden of parallel market exchange rates," he said.

He said prevailing rates were "all guess work arrived not out of systematic analysis of the pricing prompting businesses to use forward pricing to hedge against the depreciation currency and taking positions as they did not know where the rate was going. But since the market had spoken and the bank implemented what the market had requested."

Dr Mangudya said bids that were prevailing in the domestic market demonstrated a lack of knowledge about how foreign currency is priced, "what we call impact information".

Importantly, the Governor said stability and market exchange rate would restore predictability, similar to certainty that characterised a US dollar dominated multi currency ears.

"The most important thing that any business needs, whether it's banking, running grocery shop or manufacturing company, what is required is predictability, it is about stability," he said.

Source - Sunday Mail

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