‘ Forex auction tames runaway prices’
A FORE IGN currency auction system introduced by the Reserve Bank of Zimbabwe (RBZ) in June has stabilised the country’s volatile exchange rate and tamed runaway prices, analysts said this week.
They said there had recently been increased acceptance of the domestic currency, which has defended its turf against major currencies on the auction system for several weeks.
Zimbabwe’s central bank introduced the auction system in June this year to improve the flow of forex into the official system and help companies access funding for critical imports.
The RBZ used the auction system to shore up the value of the Zimbabwe dollar which had experienced a massive drabbing against major currencies on the black market since its return in June 2019. Prior to the auction system, the exchange rate had charged relentlessly, touching the US$1; ZW$120 mark in June, from US$1; ZW$2,5 in June 2019. The domestic currency has dramatically crawled back since the introduction of the auction system, trimming the gap between the formal and black-market rates.
The parallel market rate has hovered around US$1; ZW$105 for more than two months, while on the auction system the Zimbabwe dollar has traded around ZW$81 to the greenback for many weeks. The official auction rate hit ZW$80,4 in the first week of August. Economist Persistence Gwanyaya said the efficient foreign currency auction system had seen the Zimbabwe dollar experiencing stability. Gwanyaya said the stability has resulted in price correction in Zimbabwe dollar terms. He called for a downward review of prices to reflect prevailing official rates. In the past, businesses had factored the parallel market exchange rate to set prices. “There is increased competition coming out of increased access of money from the interbank market,” he said.
“We are beginning to see improved acceptance of the Zimbabwe dollar due to businesses’ ability to participate on the auction system. The auction system is doing better than expected,” Gwanyaya told businessdigest.
He said increased demand for the appreciating local currency was putting pressure on the US dollar to depreciate. Going forward, Gwanyaya warned, businesses insisting on parallel market rate linked prices will lose customers to competition. Already, more and more fuel dealers have been accepting local currency.
“We have also seen a return of the credit card and coupon system, where fuel companies are seeking to finance their business through creditor finance instead of borrowings. With fuel being a major consumer of foreign currency, we are likely to see this spreading out to the rest of the sector and influencing the rest of the economy,” he said. Consumer Council of Zimbabwe director Rosemary Siyachitema said she had witnessed a downward trajectory in prices.
However, she said the margins were small and consumers may barely feel the change.
“It’s (the price change) not something you could shout about from a mountain top, but the reduction is there,” Siyachitema said.
“We haven’t started seeing any substantial decreases. It should be more so that the consumer really feels the decrease,” she noted.
The CC Z boss indicated that prices had not dropped significantly because some operators were still factoring their black-market rate in their prices. The Confederation of Zimbabwe Retailers (CZR) this week said some retails were ignoring a legal requirement compelling them to comply with rates determined by the forex auction system.
“It is CZR's humble submission that business should support the forex auction system through responsible pricing and compliance,” CZR said in a statement “Prices should be pegged in both local and foreign currency with clear exchange rate boards displayed in each store.”
However, economist John Robertson said although there had been general stability on the currency front, this was yet to reflect on prices.
“I agree that we are reaching a chance of stability but I don’t think we have a chance of prices coming down really because the black market is still there. If supply of foreign currency met demand then the auction rate becomes the market rate which everyone uses with no black market,” Robertson said. “If you have bond notes and walk into a shop, you are not always welcome. If the certainty starts improving then more people will start trusting the Zimbabwean dollar,” Robertson said.