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'Forex auction eased liquidity crisis'

by Staff reporter
11 Feb 2021 at 06:16hrs | Views
THE move by the Reserve Bank of Zimbabwe (RBZ to introduce the foreign currency auction system in June last year eased a liquidity crisis that swept through small-to-medium enterprises (SME), global research firm, Fitch Solutions has noted.

Fitch's Southern Africa Monitor, which was released this week, also said the foreign currency auction system helped Zimbabwe calm down exchange rate volatilities in 2020.

It projected the trend to persist this year, even as parallel market rates are running amok, triggering sharp price increases for basic commodities.

Following a difficult year in which a defenceless Zimbabwe dollar, reintroduced in 2019, depreciated at a frightening pace against the greenback, the RBZ rolled out the foreign currency auction system in June.

The strategy brought little positive expectations as Zimbabweans doubted if the move would work after it flopped under former RBZ governor Gideon Gono in 2004.

Twinned with its projection of exchange rate trends, Fitch tipped year-on-year inflation to drop to 136% this year after closing at 348% last year.

This projection is in line with government's own inflation targets announced in December, but seems to downplay the implications of the ongoing price rage.

"The authorities abandoned the previous fixed exchange rate of $25/US dollar in June, instead implementing a weekly foreign currency auction designed to facilitate trade on a more transparent platform," Fitch said in its report, which looks at economic trends across the Southern African Development Community bloc.

"It subsequently introduced a second auction, in which participants were able to bid for between US$2 500 and US$20 000 per auction, as against a minimum bid of US$450 000 under the initial auction system, facilitating greater access to foreign exchange for small and medium-sized enterprises. This appears to have slowed the rate of currency depreciation somewhat. In our previous update, in early August, RBZ data showed the mid-rate (the average between bid and asking prices for the currency) at $80,4/US$. As of November 16, the mid-rate was $81,67/US$," the report noted.

Subsequent to year-end, the Zimbabwe dollar had taken a drubbing on both the official and parallel markets.

This week, the domestic currency traded at about US$1:$83 at the foreign currency auction system and US$1:$130 on the parallel market.

Before that, the Zimbabwe dollar had spent about three quarters of last year trading at about US$1:$120.

"We expect the parallel market to continue to trade at a considerable discount to the official rate given continued constraints such as low foreign exchange reserves and thus low levels of liquidity in the system, which will make the exchange rate auction system difficult to operate, and continued prioritisation of foreign exchange allocations by the central bank. While the RBZ dictates that companies must display prices in local and foreign currency terms at the prevailing market rate, the likely inability of SMEs to access foreign currency at this rate means that a de facto parallel rate will persist," Fitch said.

Zimbabwe's economic crisis has been amplified by COVID-19-induced lockdowns, which have grounded most businesses, including SMEs, as authorities battle to prevent more infections and deaths due to the virus.

Source - newsday