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The movements in the exchange rate between the US dollar and the Zimbabwe dollar are now moderating, with the price of a US dollar still falling, but not so fast as when the major corrections were in progress, and the banking sector with full backing from the authorities looking at more convergence between the rates they set.
Yesterday’s auction saw a gap of just $100 between the most expensive bank bid for a US dollar, $4 580, from the cheapest accepted bid of $4 480. This should mean, if that trend continues, that most banks will be selling their US dollars within a narrow range and that shopping around for a bank will be less extreme and the prospect of banks profiteering will diminish.
This close range between the rates that banks buy and sell foreign currency is normal. It does not mean that the value of a currency remains static, but that it tends to rise and fall according to fundamentals rather than flawed guesswork in dealer rooms of the major banks or attempts, in the present Zimbabwean circumstances, for banks to profiteer or to take extreme measures to avoid losses on their foreign currency dealing.
Yesterday 10 of the 16 bids were rejected in the bankers’ wholesale auction, although these amounted to just 45 percent of the total bid for, and could easily have been accepted within the US$20 million pool available from the Ministry of Finance and Economic Development.
The authorities have been making it clear in recent auctions, as the price of a US dollar falls largely because there are more US dollars available than banks have the local currency to buy, that ridiculously low bids will not be accepted as these can disrupt the markets.
This pressure for banks to move more in unison in each direction were reinforced yesterday with the tightest gap seen between the top and bottom bids.
A bank that overbids, that is it is willing to pay a far higher price for a US dollar than most of the sector thinks is sensible, will soon see its error when it is stuck with some rather expansive foreign currency that it will find difficult to sell without taking a loss.
Its customers are neither that desperate nor that stupid as to reinforce a mistake at their bank. The market here is self-correcting.
All banks set their own buy and sell rates for foreign currency, and the interbank bid and ask rates these days suggest that a margin of 8 percent to 10 percent is considered the norm.
These rates at the 19 commercial banks, along with the amount of the daily transactions, can generate a weighted average in rates, and that is the interbank rate. The actual interbank rate used in every other sector and sets the official exchange rate, is the mean between the bid and ask rates.
While every business understands that their bank is entitled to mark-ups, few will feel comfortable in paying more than 5 percent above the mid-interbank rate, that being the profit margin their bank normally makes from the middle rate, and few sellers will be willing to accept less than 5 percent below the interbank rate. But a bank that grossly underbids what the rest of the sector thinks is the correct price can now profiteer, making a huge mark-up on what it bought and still matching what other banks are charging for a US dollar, so the temptation exists and needs to be curbed.
There is also the possibility that those banks that bought US dollars on previous auctions for more than US$7 000, or hold stocks of foreign currency that they bought for more than $6 000, might be trying to get some ultra-cheap currency to dilute this expensive stock to minimise losses or even still make a profit on currency dealing despite errors by their chief dealer.
Reports from within the sector suggest that those banks with expensive stocks of foreign currency have already resigned themselves to making modest losses on currency dealing this month.
They can afford these, although banks hating making a loss on anything, because they have a lot of other business that is highly profitable.
Every banks makes its core income from the maintenance and transaction charges on its customers’ accounts, and in the near cashless society of Zimbabwe this is a continuous and certain stream of income.
Banks also have the interest from the loans still outstanding, although the very high interest rates mean that new loans are few and far between. But those same rates still mean that a reduced loan book pumps in a lot of money.
What we should be seeing more and more is the exchange rate still moving, and remember it can move in either direction, but not by the huge jumps we saw in May and the first half of June, or the major corrections we have seen in the last week of June and this month.
It is difficult for either the authorities or the banking sector yet to target what would be the “correct” exchange rate at the moment. The normal markers, starting with inflation rates, are not really useful.
Annual inflation rates in Zimbabwe just tell us what happened, rather than what is happening, because of the peaks in monthly inflation in the second quarters of last year and this year were out of sync with the other nine months, and the monthly rates need to stabilise before becoming useful.
For example from mid last month to mid this month the cost of living declined around 15 percent, led by the 30 percent drop if the prices of the sort of foods that ZimStat monitors, the food eaten by a respectable worker family in a respectable high density suburb, if you seek the average consumer.
This is made up of fast turnover items like mealie meal or cooking oil, or fresh foods like meat, bread and vegetables where expansive old stock is minimal.
The negative monthly inflation will obviously continue next month but this is not deflation, just everything correcting.
Once the month on month rate stabilises the authorities can then follow what authorities do in other countries and raise or lower interest rates and either buy or sell more foreign currency on their own account to ensure continued stability.
It is interesting to note that in recent weeks no legal business has to access the black market or even think about it.
If it has the local currency and has a legitimate reason to buy foreign currency it can just go to its bank, which can then sell it some and use the money it gets to buy more at the next auction.
This is the serious change introduced by the recent reforms, that banks set the pace and are fulfilling the proper role of middlemen between buyers and sellers of foreign currency. There is enough for all legal needs.
The fact that bankers then pushed the price of a US dollar to extremes, and now are correcting that error is part of the necessary learning process, but wage rises and the like, with the Government leading the way as the largest single employer, are helping to cushion consumers and those wage gains will last no matter how far prices eventually fall.
Online Reporter