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Business Writer
Zimbabwean companies will have a chance to buy a maximum of US$2 million a month if the recently introduced foreign exchange auction trading system continues to operate at the set trading modalities.
According to the trading modalities announced Wednesday, individuals, firms and public enterprises will be able to bid for a minimum amount of US$50,000 and a maximum of US$500,000 per auction.
And with the auction only conducted once every week on Tuesday, the maximum an individual or firm can buy per month is US$2 million.
For that to happen, the market will have to be liquid enough.
According to central bank figures, Zimbabwe requires US$100 million a month for industry and critical imports such as fuel.
This money is expected to come from somewhere.
The central bank expects the market to be resourced by money from offshore facilities that it will arrange. Exporters, through surrender requirements and the post 30 day liquidations is another source. The RBZ also anticipates that holders of free funds will also use the auction to sell their forex on the market.
RBZ Governor Dr John Mangudya, told a Parliamentary Portfolio Committee on Budget and Finance that remittances and free funds available in the country alone can meet the country’s forex needs.
Diaspora remittances and free funds reach at least US$100 million a month, according to DR Mangudya. So theoretically, the country should be able to meet its foreign currency needs.
It then lives the question, how come the exchange rate continues to fall when there is so much money coming into the country, enough for critical requirements.
One answer could be that foreign currency is not being bought only to import, but also to hedge.
The RBZ blames non-monetary factors such as speculation and manipulation among other avarices, but you don’t do these without the corresponding local dollar. No one can deliberately give up so much value. No one can sweat assets, only to give away value by engaging in currency manipulation. At the moment, for every US$1 million bought, one has to for gore $90 million of revenue generated. Revenue which is now hard to come by when you look at the declining sales volumes.
The answer can be found in increased reserve money supply, which between the second week of June 2020 and the end of June 2019, grew by over 300 percent to $13,3 billion.
This is money creation, without a corresponding production. We are in a country where economic players are inflating prices, even in US dollar terms.
Inflated prices in whatever currency means getting paid huge sums for little work or production done.
If Government is not strict in reviewing and comparing the prices it gets charged, it will require billions for very little work done, and those awarded inflated contracts, for little delivered, will put pressure on the exchange rate, even on the auction system.
Another key consideration, that seem to have been overlooked, is the role of those with free funds and exporters. Do they have a say in price determination or they are just price takers?
It happened back in 2004, and the auction system fell out of favour with exporters as it made them rate takers. What safe guards have been put in place to make sure exporters are happy with the price that they get? At a time, export growth is key, there is need to make sure exporters’ needs are also taken care of. If not, then disgruntlements and eventual abandonment of the system cannot be ruled out.
Online Reporter