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Tawanda Musarurwa
It can easily be argued that the lack of an efficient official currency system has contributed to the proliferation of illegal foreign currency trading, which has had debilitating effects on the local economy as businesses have tended to track the speculative nature of the alternative system.
Zimbabwe’s monetary authorities have staggered from a managed float, to a free float, to a fixed rate and now to an auction system as they sought for a proper recipe.
Perhaps the latest auction system could be the one, if results so far are anything to go by.
First things first, the new foreign currency system has given both the central bank and market players an opportunity to discover the ‘real rate.’
According to the Corporate Finance Institute (CFA), a Dutch auction is “a price discovery process in which the auctioneer starts with the highest asking price and lowers it until it reaches a price level where the bids received will cover the entire offer quantity.”
An efficient ‘price discovery’ process brings together buyers and sellers in the market and lets them interact as they determine the value of an asset in the marketplace.
In Zimbabwe’s foreign currency market, the auction has worked to remove private companies from the illegal market where generally speculators are key players in rate determination.
Although the past week marked the fourth time of foreign currency auctioning, it clearly showed the players are still seeking out the optimum (read “real”) rate.
Experts say an observed trend in the determining a ‘real exchange rate’ is the factor of depreciation, which is both expected and desired.
The RBZ’s auction has seen such a trend.
For the first auction, the weighted exchange rate of the inaugural auction system was $57.35 to the US$1, while the second auction saw the rate moving to $63.74.
After the third auction, the Zimbabwe dollar eased slightly by 3.2 percent to $65.87 to US$1, and in the latest auction the rate adjusted by 4.6 percent to $68.88 to the US dollar.
A comparison of the four auctions to date show that there is growing expertise in price discovery.
For the latest auction, the top bid fell to $85, from the $100 in the first auction, $92 in the second and $90 last week, while the lowest bid in this week’s auction was $40, but the lowest allotted bid was $64.20, with all bidders below that price missing out as higher bidders had exhausted the foreign currency on offer.
The tight gap between the lowest allotted bid and the weighted average suggests that most bids were in an even tighter range than the top bid suggests, possibly something like $64.20 to $72.
Economist Persistence Gwanyanya says the auction system in tandem with the dual pricing system will create demand for the local currency.
“The foreign currency auction system is coming to salvage the Zimbabwe dollar.
“Given an option, the public would like to use the Zimbabwe dollar for transacting, but this was not the case as businesses were now demanding the US dollar.
“However, now with a functional official foreign exchange market in place, the Zimbabwe dollar can be sustainable,” he said.
“It is important that businesses abide by the rules of the auction system, because currently some businesses are still pricing their goods according to the parallel market rates even as they access forex from the auction, which is tantamount to double-dipping.”
A lot is pinned onto the success of the new foreign currency auction system, so much so that Treasury expects the rate of inflation to slide by 300 percent by the end of the year. Largely attributed to speculative activities on the illegal foreign currency market, the country’s high levels of inflation currently stand at 737.26 percent as at June 2020.
“Retailers were benchmarking their prices to these parallel rates prior to the introduction of the (foreign currency) auction system, which they are now correcting in line with the advent of the auction determined exchange rate,” said Finance and Economic Development Minister Mthuli Ncube this week, while presenting the Mid Term Fiscal Policy Review.
Online Reporter