Is a common expectation unconscious collusion?

BUSINESSWEEKLY

Last Word

ONE of the trends in the weighted average produced by the foreign exchange auction system is the continuing drift down in the value of the Zimbabwe dollar, but this drift combined with now tight bidding bands. There are three potential explanations. Under-bidders in a previous auction, those who bid seriously but too low to make the cut, now need to pay bills urgently and so submit a higher bid, adding a bit extra onto what they think the rate might be, or at least adding a small percentage to what the rate was last week. Then there are those who now think they see a trend emerging, and so tailor their bids to match that trend. If the local currency is falling by a small percentage, then, they think, it makes sense to add a small percentage so that they remain on the swim. Finally there must still be many who reckon the black market is a truer reflection of value and thus see the exchange rates converging on the black market rate. Certainly some of the few sellers who have entered the auctions fervently believe this. The problem with all three groups is that the Zimbabwe dollar would continue to slide even if enough foreign currency was available at a future auction to satisfy all valid bids with some left over. We would have the curious position that supply and demand were not fixing the rate, but rather perceptions were doing this. The last auction threw this up into a bright light. Almost all valid bidders, those who met all the Reserve Bank rules, managed to get allotted currency; the value of the unsuccessful bids was less than 7 percent of the value of all valid bids. Yet the lowest successful bid was only a few cents below the previous week’s average. At least those who bid at the previous week’s average, or even rounded it down to the nearest whole dollar, won through. But a majority must have bid higher, for the three reasons already noted. This particular thought experiment, of an oversupply of foreign currency one week, raises the interesting question of when does a common perception, driven by several forces to make things more complicated, produce the same effect as collusions. The whole auction system is designed to make collusion impossible, although people do talk socially and many of the top managers in the larger companies do know each other. If bank managers are giving advice, from what they see as the emerging trends, then we could have a set of self-fulfilling prophecies, all backed by information considered reasonably trustworthy. This talking down or talking up an exchange rate is nothing new. And the spell of serious inflation over three months when legal access to foreign currency became almost impossible and the black market surged did not help to moderate the pessimism that seems to fall on all financial manager types. Yet the auction system is basically a clean break, a reset of the whole market. The bidder pessimism needs to be thought through in light of other market forces. Prices, except for a very narrow range of products where the legal exchange rate was being used to calculate the numbers in dual pricing, have remained remarkably steady. For many of those involved costs have in fact come down, from the black-market generated costs to the auction generated costs, and so even minor weekly adjustments have yet to become necessary. Then there was the re-opening of the Zimbabwe Stock Exchange. Even after five weeks of closure, prices still fell, not by much but still down. Here was another market driven by supply and demand giving a contradictory picture, one that the price bubble built around black market rates was not an accurate reflection of value. These sort of actual inflation trends, rather than predictions, should be incorporated into the general consensus building process. And we need to remember that the Zimbabwean economy has a tendency to move in discontinuous jumps, rather than follow the trend lines generated by Excel on our graphs. One interesting dislocation now coming to the fore is those US$75 a month Covid-19 allowances being paid to all State employees. The sums do not sound much, but with the discussion over 300 000 cards needed we now know that a minimum of US$20 million a month is going to be pumped into retailer nostro accounts, and if that if the pensioners are in a separate group then it will be more. The actual process of producing those hundreds of thousands of cards means that the bulk of the first two months of allowances are likely to be spent within a couple of weeks, so we have US$40 million about to fall into retailer nostro accounts. That sort of loading of the supply side is going to make a lot of differences to the demand side as well. Another factor about to enter the equation is the new Thursday auctions for the smaller businesses but with a slighter tighter emphasis on the category 1 products on the import priority list. No one knows, at this moment, how having two auctions of different types is going to affect exchange rates, nor how much influence one auction will have on the other. Until we hear otherwise we can assume that the big- bid auction will remain the setter of the official exchange rate, but there is no guarantee that the Reserve Bank might not average the two auctions to generate a rate, every Thursday. It must be on someone’s agenda.