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The Reserve Bank of Zimbabwe (RBZ) decision to switch from the interbank market, often an over managed market, to an auction system should produce a far more efficient market for exporters selling foreign currency and importers buying for their needs.
Coupled with the tactics already adopted by the RBZ to kill liquidity in the black market, at least for larger transactions and the accumulation of large blocks of foreign currency, along enforcing the original rules of compulsory surrender of unused retained funds after 30 days, the black market might well become an insignificant force.
The most interesting new measure is that all retailers have to display prices in both local dollars and US dollars, but using the latest “ruling rate” generated by the auction system. This will mean that they can track prices against the US dollar, as they have been doing unofficially, but not against the black market rate.
They have to use the official rate and buyers will be able to see exactly what they are doing.
The multi-pronged approach does four things. It first of all establishes a real market for foreign currency and setting of exchange rates; there is no longer a managed float of the Zimbabwe dollar.
US dollars are sold at the price buyers are prepared to pay, but with the provisos that the buyers have to be genuine importers or users of foreign services, have to use what they buy for the intended purpose, and cannot stock up on foreign currency for future needs.
Secondly, the supply of foreign currency into the official markets will be far greater. Exporters in various sectors are allowed to retain ever increasing percentages of their export earnings in nostro accounts.
The intention was to cope with the demands by exporters for easy access to foreign currency to buy what they needed to remain in production and increase their exports.
But the de facto policy of allowing exporters to hold onto unused export earnings for months has seen most, not unreasonably because of the inflation generated by that same desire, hoarding their US dollars to retain value.
Zimbabwe has adequate foreign currency reserves, but the bulk are held in the private sector, not under RBZ control, hence the enforcement of the 30-day rule.
The legitimate and original purposes of the retention scheme are still being met.
An exporter has 30 days to buy equipment, spares, raw materials, the inputs needed for processing and even payment of dividends to foreign shareholders.
The RBZ has always kept a good hold on how exporters use that foreign currency, and has been getting better at detecting cheating.
Exporters can fairly buy what they need, but cannot, for example, use their nostro money to buy Scotch whiskey for their cousin who owns a supermarket or even soya beans for their golf-buddy who makes cooking oil.
Those rules have to be ever more strongly enforced if the new system is to work, since the object was always to ensure that exporters could continue to grow exports, not make fortunes by playing the currency markets.
This is where the already announced enforcement of the original policy, that exporters must use or sell, through official banking channels, their retained exports within 30 days is so important.
Those retained export earnings are going to be the main source of foreign currency in the new auction system.
But the RBZ has been fair. Exporters no longer have to hoard foreign currency to retain value, since the interbank market was, most economists agree, over managed and did not always reflect the true value of the held currency.
The third measure is drying up liquidity in the black market, by making the use of instant mobile payments, Zipit transfers or internal bank transfers impossible for larger sums.
Those moves do not have much effect on the street traders buying a few Diaspora dollars, since the sums are so small, but do block large companies and market manipulators accumulating the significant sums they need or want.
The fourth move is to stop the dreadful policy of so many of tracking their Zimbabwe dollar prices against the black market US dollar, a policy that has seen rampant inflation.
To be fair, suppliers had little option under the present system since they found it harder, especially with the rate freeze at $25:US$1, to access funds on the intermarket.
But, because they were doing this, the switch to the auction system is not going to raise prices.
With importers now able to buy their legitimate foreign currency needs at the auctions, or from their banks at auction rates between auctions, they will not need to pay ever rising processing premiums to get around RBZ restrictions and continue using the black market.
By waiting for the day when the black market sets prices before switching to auctions the RBZ has been able to introduce the new system without having everyone screaming in opposition that this caused price rises.
The new ruling rates based on the auctions are going to produce in the short term at least exchange rates significantly higher than the Z$25:US$1. But because of the better supply of US dollars into the forex market by the 30-day surrender policy, and the restrictions on just who is allowed to buy, the auction rate will be well below the black market rate.
But even if it is a bit closer to the black market rate at the beginning, this will still give price stability.
At worst there will be price stability. But there is a probability that if the auction system works properly, and if the other measures to ensure more foreign currency reaches the official markets and the black market is starved of liquidity are well enforced, then prices could even start falling.
And once that starts happening then there will be a positive feedback loop, that with inflation reined in exporters will start choosing their day to sell and will stop hoarding their export earnings.
The growing trust in the Zimbabwe dollar will again stop ordinary people from hoarding their few US dollars quite so tightly, or even buying more banknotes from the pavement traders to keep value.
The RBZ has now stepped back from managing the exchange rate at the point of sale. That stopped working with the rate freeze at the start of the lockdown.
Instead the RBZ is doing what a central bank should be doing, setting up a system that reflects real value and then policing it, and using its wide-ranging powers to ensure better and tighter policing.
That switch brings Zimbabweans into a real world, the one other countries use, and allows the Zimbabwe dollar to become a real currency in fact, as well by decree.
Online Reporter