admin
Misheck Ugaro
The foreign exchange auction trading system was introduced on 23 June 2020. It took just about four auctions for the market to start accepting that the system was sustainable.
Economic agents adopted mixed strategies with some showing clear signs of either doubt or resistance to the new system as pricing models continued being based on expected parallel rates.
With an initial auction amount of U$10 million allotted against a total bid amount of U$11 million, the shortfall of U$1 million was the highest before it started reducing over the period until by the last two auctions ending on 18 August where a total $14 million was allotted.
This matched the total amounts of bids from both the SME and main auctions. To buttress the system, authorities introduced a separated SME auction to cater for lower bids as the initial main auction limited the amounts of bids to a minimum of $50,000, which was considered higher than normal SME requirements.
These two auctions are still running parallel although they are achieving the same auction rate.
A further analysis of the auction performance reveals that the amounts traded peaked at a total U$19 million on both auctions of 4 August before coming down to last week to $14 million. The exchange rate has risen from 57.3582 at the first auction to stabilise 82.9184 at the most recent auctions. What is particularly notable are the three convergences namely;
- The convergence of the SME auction rate to the main auction rate 2. The convergence of the lowest and highest bids having started with a gap of 75 and now down to 8 as at the last auction 3. The convergence of the parallel rate to the auction rate now down to about 5 having started off at over 100 during the first auction.
By any standards the market has converged and the local currency is now expected to hold for a while at the 83 range with indications of a likely decline as we move into the last quarter of the year.
Factors in support of a fall in the rate include mainly positive sentiment which is now discernible in the market. Recent comments from important players’ representatives including industry, retailers and even the SMEs sector all indicate that the market is so far satisfied by the performance of the auction.
The statistics trend above give credence to the promise by the monetary authorities at the introduction of the new system regarding the efficacy of the new method. Indeed, in the last few auctions the market has experienced some inflows from exporters starting to release funds onto the market with an initial inflow of $2.5 million sold at the fifth auction.
This trend is now expected to take root in the system with exporters pumping more volumes to cover local production expenses.
Curiously though, a significant number of players, especially in the retail sector, are still not playing fair as they are resisting to transparently display both prices on their shelves.
In fact, it had to take a directive in the form of SI 182 to compel retailers in particular to display prices in both currencies. This was under normal circumstances not necessary if all players adopt a positive and responsible attitude.
In fact, authorities have full justification for viewing this attitude as destructive which actually borders on fraud against the tax authorities. In reality what players are doing is to surreptitiously hide their demand for local currency by pricing goods and services in foreign currency while receipting in local dollars.
Players are pricing in US dollars but trading in local currency! This is akin to having one’s pie and eating it at the same time. It amounts to tax fraud and not expected of big corporate organisations. It unfortunately paints to a lack of corporate social responsibility as it amounts to cheating both the consumers as well as the tax authorities.
Players must issue fiscalised receipts in the currency of trade and dispense their tax obligations accordingly.
The hidden demand for local currency must come out transparently and currently it is being manifest through the provision of both the receipt and change in local dollars when a consumer purchases in US dollars and has tendered foreign currency at the till. That demand in fact supports a strengthening of the currency!
The auction system was introduced as a price discovery mechanism in order to establish transparency on the market. It has performed well and in many cases more than other players expected. It is possible for the market to start trading on its own without the auction.
Facts on the ground in support of this apart from a hidden local currency demand include that currently there is over US$1 billion total balances in Nostro accounts at the banks.
Further, the Central Bank Report of 31 July shows that reserve money decreased by ZW$345.1 million, from ZW$17.01 billion recorded on the 24th of July 2020 to ZW$16.66 billion as at 31st July 2020.
These tight monetary conditions support a stable to strengthening local currency. On their part, authorities’ actions have supported the opening of the forex trading system.
We are also noticing an increase in locally produced goods on the shelves implying a steady rise in local production.
This is the time that banks are urged to now adopt a forward looking position and start encouraging their clients to trade in between auctions as well as establish interbank trading amongst themselves.
We expect all players to gradually increase inter auction trades, which should persuade the authorities to gradually lift off the auction.
The system should now lead itself to total open trading as initially planned and elucidated by the Monetary Policy Committee to ultimately attain an open foreign currency trading system using the Reuters system.
Bongani Ndlovu