Latest News Editor's Choice

News / National

More forex for auction system

by Staff reporter
25 Aug 2020 at 07:01hrs | Views
More foreign currency will now be pumped into the weekly forex auction system, as it has become critical in stabilising the exchange rate and consequently prices.

Further, the Government will keep a "tight leash" on its expenditure to consolidate the exchange rate and price stability achieved so far, Finance and Economic Development Minister Professor Mthuli Ncube said in an interview.

The Government introduced the foreign exchange Dutch auction system on June 23 to reduce exchange rate instability and improve price discovery. Under the auction system, successful bidders pay what they bid, regardless of whether that is higher or lower than the average, with the highest bidder getting the first allocation.

With 87 percent of imports now funded with foreign currency in the auction system, prices have largely stabilised after months of accelerating inflation as many tried to second-guess what the black market rate would be when they renewed stock.

The black market, which was skyrocketing almost daily, has stabilised to levels below those at the start of the auction system with end buyers paying around $110:US$1 for transfers and $90:US$1 for cash; the original sellers of bank notes get significantly less as there are wide margins in the informal market and recent changes in monetary policy mean that the first seller of a small banknote obtained from a Diaspora relative could do as well in a bureau de change.

Consumers are expected to get more value for their money when some retailers, mainly pharmacies and informal traders together with hospitals, start quoting foreign currency prices in line with the auction rate in accordance with a Government directive.

Last week, the forex rate was US$1:$82.91, less than half a percent change on the week before with a narrow bid range, leading economists to predict that a stable plateau has now been reached.

Prof Ncube conceded that the introduction of the auction system for foreign currency had brought the much-needed stability to the exchange rate.

"Each week, the resultant weighted exchange rate has been increasing but at a decreasing rate to a point where last week the exchange was the same as the week before.

"The auction was necessary as a way to providing leadership and direction to the market, while improving the process of price discovery and giving value to our domestic currency.

"Currency stability is critical for price stability and the containment of inflation. Indeed, inflation in the economy is directly caused by changes in the exchange rate, especially in the parallel market. Therefore, stability in the exchange rate means stability in prices. The last few weeks have experienced stability in prices," he said Prof Ncube said on its part, the Government in general, and Treasury specifically, is committed to sustaining the auction "into the future", adding they are also determined to keep a "tight leash" on expenditure in order to buttress exchange rate stability through containment on the growth of money supply.

"Treasury has also been offloading some foreign currency onto the auction in order to provide more foreign currency to importers, and will continue to do so into the future," said Prof Ncube.

Following the measures adopted by Government, including the forex auction system, premiums on the parallel and official exchange rate has significantly narrowed from a peak of 300 percent on June 22 to the present 26.4 percent.

In terms of supporting the Monetary Policy on containing money supply and hence inflation, the Government has resolved: there will be no more recourse to central bank overdraft; issuance of Treasury Bills only for Budget; keeping the public wage bill below 50 percent of total revenues from 92 percent in 2017; rationalisation of posts, freeze on hiring except for critical sectors or posts; and the Public Finance Management System controls roll-out to all departments and local levels. Further, the new Procurement Act that is designed to put a leash on abuse by accounting officers, is now functional.

Source - the herald