Banks strike forex auction settlement deal
ZIMBABWE’s banking system has agreed to settle funds allocated at the foreign currency auction system within two weeks, central bank governor John Mangudya has said.
Introduced in June 2020 to address a dire foreign currency crisis that threatened to ground hundreds of frail industries, the foreign currency auction system is mainly funded through export proceeds remitted by exporters to the Reserve Bank of Zimbabwe (RBZ) through its controversial surrender requirements.
But it ran into serious trouble during the final quarter of last year, when many exporters waited for two weeks before accessing allotted funds.
The delays undermined companies’ efforts to import raw materials and industrial machinery.
Almost US$800 million has flowed into industries since June, Mangudya said when he announced his Monetary Policy Statement last week.
The central bank chief did not disclose how banks settled on the two-week timeframe given the headwinds that confront the economy this year.
The potential for depressed export earnings remains in 2021.
Globally, the Covid-19 scourge continues to shake markets with a fresh round of lockdowns rolled out at the end of 2020 likely to close off foreign markets and force industries to trade in an already weak domestic market.
“Working closely with banks, the bank (RBZ) has managed to resolve the glitches and payment backlogs experienced last year by some banks’ customers in the settlement of funds from the auction,” Mangudya said.
“The bank has agreed with banks to ensure that foreign currency allotments are settled within 14 days from the date of auction.
“This clearing period will enable the (RBZ) and banks to fund the allotments and for banks to undertake the requisite background checks on their customers, where necessary.
“Since its introduction, the foreign exchange auction system has gone through a number of refinements to plug observed loopholes, taking into account valuable contributions and suggestions from the market.”
He added: “The goal has been to ensure the sustenance of the system through enhancing the supply of foreign currency into the formal market, while maximising the system’s allocative efficiency without undermining the proper functioning of the market.
“A significant proportion of the total amount allotted has been earmarked for imports of essential goods, especially raw materials, equipment, pharmaceuticals, chemicals, fuel and electricity.
“To date, more than 70% of total foreign currency allotted has gone towards import of raw materials, machinery and equipment while other essential and strategic imports, including pharmaceuticals and chemicals, fuel and electricity, have taken around 11% of the total allotments.”
The foreign currency auction system has achieved several milestones since its relaunch last year after faltering in 2004.
It took the steam out of rampaging black market forex exchange rates, which were running amok during the first quarter of 2020.
Parallel market rates reached US$1:$165 during the period, but retreated to about US$1:$120 after the auction floor came through, as importers trooped back to the formal system for some of their forex requirements.
In January, former RBZ advisor Eddie Cross said the central bank had accumulated backlogs of over two weeks at the end of 2020.
He also revealed that State firms were crowding out the private sector at the foreign currency auction system.
Cross, who spoke during last month’s edition of the Big Debate, said within the Monetary Policy Committee, there had been a push to limit the extent to which government departments accessed foreign currency on the auction system.
“They are receiving quite a substantial sum in United States dollars every week and we have been arguing that some of this should be liquidated on the productive sectors, instead of being used for government purposes,” Cross said in a contribution to the debate, which ran under the topic Zimbabwe 2021 Economic Prospects.
“All the critical import requirements like fuel, bulk oil, cooking oil and soya beans are all being imported now by the private sector and the auction system is providing that after a decision taken by a subcommittee of Cabinet.
“The (foreign currency auction system) arrears, which had accumulated up to the end of the year to US$70 million, about two weeks," auction, we were able to clear (in the first week of January).
“So for as long as we continue to meet demand on the auction system, I think it will continue being the primary determinant of the official exchange rate.”
The RBZ forecast annual inflation to plummet to less than 10% this year, driven by a good agricultural season and fiscal and financial sector stability.
But an inflation rate of less than 10% appears overly optimistic given the low domestic demand and trouble on the export front.
The foreign currency auction system has achieved several milestones since its relaunch last year after faltering in 2004.
It took the steam out of rampaging black market forex exchange rates, which were running amok during the first quarter of 2020.