‘Parallel market becoming less lucrative’
ECONOMIC analysts have revealed that recent trends within the foreign currency auction system point to the success of various monetary interventions that have been put in place by the Reserve Bank of Zimbabwe.
Data from the foreign currency allocations on the forex auction market shows that the current allotments are a significant decrease from the US$40 million which the forex auction allotment averaged in the same period in 2021. The value of foreign currency allotments in the foreign currency auction market continued to fall, as the Zimbabwean dollar marginally depreciated in the interbank rate moving to ZW$628,2 against the US dollar from ZW$626,2 the previous week.
The RBZ’s forex auction system injected US$11,05 million into companies in the week ending 18 October 2022, representing a US$557,2 thousand increase from the US$10,5 million a record lowest since the inception of the auction system distributed the previous week.
The central bank introduced the forex auction system to provide foreign currency access to companies at a cheaper rate, a measure which helped in stabilising inflation from a 837 percent high in July 2020. Offering his analysis on this market trend, Bullion Group Chief and Member of the Monetary Committee Mr Persistence Gwanyanya said the current market dynamics are changing.
“The weekly allocations are dwindling, the exchange rate is stabilising, the parallel market is becoming less lucrative and interbank trades are starting to pick up. The traction on the interbank will be supported by the recent increase in interbank sales limit from US$20 000 to US$100 000 per week. As the monetary policy remains tight, banks have to support their customers especially those borrowed with foreign currency. Some banks are pre-funding auction allocations to create value for their customers and we expect this trend to continue at more banks.”
Unpacking the forces influencing the allotments in the forex auction market, independent economic analyst and researcher, Mr Munyaradzi Mhaka said the sharp decline in auction flows was a direct result of the various tight monetary measures monetary authorities have put in place.
“Authorities tightened screws on formal sources of capital through the 200 percent interest rate regime, this measure closed a major source of cheap finance for speculative demand of forex, the arbitrage benefit was closed as a result which therefore suppressed demand for forex on the auction market,” said Mr Mhaka.
Mr Mhaka said the introduction of gold coins has created a demand diversion resulting in them being a safe haven for storing value hence the significant drop in demand in the forex auction.
“A significant level of demand was mainly from versatile investors who needed a store of value, hedging against a depreciating local currency, with the introduction of the coins some have diverted their attention towards the coins thereby suppressing the demand for the US$ on the auction market,” he said.
Moreover, Mr Mhaka pointed to the treasury’s decision to briefly suspend outstanding payments to some overpriced Government suppliers as one of the forces influencing the dip of forex demand in the auction market.
“The decision squeezed liquidity out of the market thereby reducing money supply, the loose liquidity that speculators had access to was immediately halted. With the prospects of another round of convertible gold coins hitting the market soon, demand may be expected to keep receding in the medium term.”
While auction flows have dipped, it has coincided with the decline in inflation, which eased monthon-month as prices stabilised. Moreover, the spread between the interbank rate and the parallel rate has been reduced to between ZW$700 and ZW$820 according to Zimpricecheck, a website which collects exchange rates figures in the market. Last week’s main auction was allotted a grand total of US$9.7 million while the SME auction was allotted a total of US$1,3 million.