RBZ inks deal to save auction system

THE Reserve Bank of Zimbabwe (RBZ) has inked a US$150 million facility with the Africa Export Import Bank (Afreximbank) to ameliorate significant pressures being exerted on its under-fire foreign currency auction system as demand outstrips available funding, according to central bank chief John Mangudya.

RBZ data released in the bank's August Monetary Policy Statement showed the forex auction system, said by industries to be saddled with backlogs of up to nine weeks, had injected US$1,72 billion into companies by the end of last month.

The injection has been credited with boosting exporters' capacity to import raw materials and serve the domestic market.

Mangudya said 56 auctions had been conducted by July 27, small-to-medium-scale enterprises (SMEs) receiving about 14% of the allocations.

In his first bold admission that all was not well on the forex auction system, the central bank boss said he had to approach the Afrieximbank, one of debt-strapped Zimbabwe's last remaining creditors, to arrange Letters of Credit (LCs) after demand for forex rose steeply in the first half of the year,

overwhelming a market that had recently been touted as the last hope for those seeking cheaper foreign currency.

Mangudya said along with inking the LCs deal, the central bank held crucial talks with the regional lender to restructure Zimbabwe's growing debt to give it headroom to ask for more loans.

The southern African country has struggled to pay off debts, with its crisis being compounded by the outbreak of Covid-19 last year, which affected plans to start servicing billions of dollars of debt to an array of international creditors.

The RBZ governor said these measures were part of a broad strategy being pursued by authorities with offshore partners to unlock fresh credit and pay crucial requirements.

"The bank continues to engage its offshore partners to unlock critical external funding to support the economy," Mangudya said.

"The bank has also put in place a US$150 million Letter of Credit (LC) facility with Afreximbank, which will see participating banks issue letters of credit to their qualifying clients to import essential raw materials and other inputs to support the current growth trajectory. The LCs will go a long way in easing pressure on the foreign exchange auction system as some of the critical imports will be financed under this arrangement."

In an analysis of the second quarter economic trends released three weeks ago, the Confederation of Zimbabwe Industries said companies were experiencing delays of between six and nine weeks on the settlement of winning bids on the auction market.

It said this was a sign that there were supply and demand distortions, as well as a faltering price discovery function of the auction system.

"This has greatly affected cash flows and made planning on importation of raw materials difficult and the impact of this is likely to show up in second quarter performances," the CZI said. "This has seen some companies experiencing a decline in production compared to the previous quarter. Of the surveyed businesses, a significant percentage of 33% pointed that they realised above 10% growth in production in Q1 2021. This can be attributed to increased sales and consumer demand in the market. Moreover, Q1 (first quarter) 2020 operating environment was characterised by severe power cuts and shortages of fuel."

But in his statement yesterday, the RBZ boss said the auction system had saved companies.

"The foreign exchange auction system, which attained its first anniversary on 23 June 2021, has contributed immensely in bringing transparency in the trading of foreign currency as well as the stability in the exchange rate which has culminated in price stability," Mangudya said. "After 56 main and 50 SMEs auctions, a total of US$1,72 billion had been allotted as at 27 July 2021, representing 98% of total bids submitted to the auction. Reflecting the importance of the SMEs sector, the share of allotments of the SME auction to total allotments grew from 3,5% in the third quarter of 2020 to about 14% in the second quarter of 2021."

He added: "Notwithstanding the adverse impact of the Covid-19 pandemic to mobilise foreign finance required in the economy, the bank successfully restructured its obligations with the African Export-Import Bank (Afreximbank) during the first half of 2021 into a longer-term facility, a move that has reduced the repayment burden and unlocked capacity to avail more resources for balance of payments support to the economy."