Forex auction restores hope
THE foreign exchange auction system, which had a flying start, has reignited prospects of a stable Zimbabwe dollar, which would help forestall the impact of the fallout from the coronavirus pandemic.
After only two successful auctions, grain millers have already indicated that they expect the price of bread flour to fall significantly on account of improved access to cheaper foreign currency for wheat imports, a development expected in all other sections of the economy.
The millers said most businesses had resorted to using black market rates when quoting prices of goods and services and the premiums must now translate into price reduction across all economic sectors, because the auction now provides access to cheaper forex.
Grain Millers Association of Zimbabwe (GMAZ) chairperson Mr Tafadzwa Musarara said the auction is expected to create a reliable and cheaper source of foreign currency.
“It (access to forex) has been fair and very effective so far. It is a reliable way of getting foreign currency, which makes it easier even to remit (forex) outside the country without the risk of violating the law.
“There is also another risk that has been averted (through forex auction system): the risk of buying foreign currency on the parallel market only for the funds remitted to be flagged as laundered money.
“Everyone was using the black market for their costing and now they are getting foreign currency cheaper at perhaps 40 percent lower than the black market, so we expect that 40 percent savings to be pushed to consumers,” he said.
The exchange rate eased to $63,7 against US$1 at the second straight auction on Tuesday this week, a movement of just over 10 percent from the $57,3 realised at the inaugural auction as more importers took part.
Most of the forex was allotted to the productive sectors of the economy. The auction system, which was introduced on June 23, replaced the stuttering interbank market that had been adopted in February last year.
The Reserve Bank of Zimbabwe, however, temporarily adopted a fixed exchange rate regime of 1:25 in March to militate against the devastating effects of Covid-19.
But this made it uneconomic for exporters to sell at fixed rate, resulting in many withholding their funds and starving the market.
This unleashed a wave of successive price increases that have since eroded incomes, especially for low income earners. Also, savings have been buttered while inflation has shot to a post-dollarisation high of 786 percent by May, from 5,4 percent in September 2019.
Without a systemic market-based exchange rate determination system, the market sought to hedge the ravaging impact of exchange rate volatility and escalating inflation through forward pricing, setting prices way above the speculative open market rates.
Hope for economic recovery
Authorities may have found a viable solution in the auction system, which captains of industry believe has restored hopes for the economy.
Analysts initially forecast the economy to slump between 15 to 20 percent this year due to Covid-19.
Before the outbreak of the disease, Government initially projected a 3,6 percent growth. Industrialists said the absence of a formal foreign exchange market had made it increasingly difficult to access foreign currency for businesses, in addition to fuelling local currency volatility.
“High unemployment, low production and productivity levels and the currency crisis had almost eliminated any recovery prospects of the economy,” Confederation of Zimbabwe Industries (CZI) said in a policy response paper on the new foreign exchange auction system.
It also said the doing business environment has been worsened by the Covid-19 outbreak, which has shuttered global economies and collapsed aggregate demand, disrupted supply chains, caused job losses and debt accumulation, including working capital constraints.
True auction system
The industry lobby group, however, cautioned that there was need to continue operating the auction system transparently, especially drawing from past unsuccessful experiences in 2004 and 2005.
“The auction was tried in 2004-2005 and failed. We know why it failed, but we will learn from history and avoid the same mistake.
“As we all know, the key success factors are: allow the auction to be a true auction and maintain fiscal and monetary discipline,” CZI said.
For the auction system to succeed, CZI added, there was need for market confidence by allowing free interplay of market forces while authorities must religiously maintain an iron-clad grip on fiscal and monetary discipline, including ensuring stability of local currency.
“For the auction to work and influence the price of foreign exchange across the economy, it must be perceived to be credible. We know that the auction market in 2004 degenerated into an allocation system, not an auction. So, the question is: how can we ensure that the auction is perceived by the market as credible?”
The industrial body believes that it is critical to maintain stability of the Zimbabwe dollar and its viability as a store of value.