Economy

Foreign Currency Auction System expected to bring sanity in the foreign exchange market

Following the annunciation of the Foreign Exchange Auction Trading System, The Zimbabwe Coalition on Debt and Development (ZIMCODD) has implored the Reserve Bank of Zimbabwe to exercise transparency. This is to be done through disclosing the nature of information they will publicize and the names of winning bidders, amounts involved and the intended use. This will go a long way in ensuring that the scarce foreign currency is put into good use. 

In yesterday’s official statement, June19, ZIMCODD praised the bank’s promise to disqualify players found to be participating on the Auction for the sake of currency manipulation but however stressed that disqualifying them only is insufficient. 
“In this regard, ZIMCODD strongly feels that disqualification is a necessary but not sufficient condition to discourage unscrupulous behaviours. Rather, the apex bank must put in place deterrent and punitive measure in place,” said the ZIMCODD.
Furthermore, ZIMCODD mentioned that the auctioning trading system will only work when the central bank is sincere and allows the rate to be determined by the market forces.
The coalition commended the Central Bank for giving 1st preference to those on the import priority list adding that it is imperative that the bank pay directly to the suppliers of raw materials and equipment for easy monitoring and to avoid manipulation.
ZIMCODD also complimented the new monetary policy. It said that the policy is now in sync with reality and that transparency and accountability are at the centre of the foreign exchange market. Here, the auction results will be released and published on the auction day. 
Following the RBZ Press Statement of 8 June 2020 in which the Monetary Policy Committee advised that a formal market-based foreign exchange trading system will be put in place, the Bank disclosed its plans to fully implement the Foreign Exchange Auction Trading System with effect from 23 June 2020. The Auction System is replacing the fixed exchange rate system which was introduced in March 2020. 
The fixed exchange rate system failed to restore confidence in the market due to its illusionary nature in which it was not in sync with reality as businesses pegged their prices on the parallel market exchange rate.
Whilst the government insisted on the fixed exchange rate, foreign currency shortages worsened resulting in the unprecedented spike of the inflation rate to 785% as of May 2020. 
The high levels of inflation coupled with unrealistic exchange rate of USD1: ZWL$25 resulted in the market distortions which saw fuel being sold at less than the import value. This spelt out acute shortages of fuel with some service stations selling fuel in foreign currency. The adoption of a Foreign Currency Auction System is, therefore expected to bring sanity in the foreign exchange market especially in ensuring transparency, accountability and efficiency in the trading of foreign currency in Zimbabwe. 
ZIMCODD reiterated that over and above the measures in place, the RBZ should always be on the lookout for the abuse of the facility. The coalition professed its reservations with the minimum cap of US$50 000 which ordinarily crowds out the informal sector from participating in the bidding process. This creates an opportunity for third party transactions in which the informal sector will have to pass through to access foreign currency which will only be costly in doing business.
“The premiums involved in engaging third parties will increase the cost of doing business for the informal sector. ZIMCODD is therefore appealing with the Central Bank to come up with a dual auction system with one that accommodates the informal sector. This will go a long way in their retooling especially after 3 months of total lockdown,” said ZIMCODD.
Foreign currency shortages have been singled out as one of the major challenges affecting industry and commerce in Zimbabwe. Zimbabwes trading position as a net importer of goods and services worsens the situation. The impacts are evidenced by acute shortages of fuel, raw materials and imported electricity which rely entirely on the availability of foreign currency. This has had negative implications on the growing balance of payment deficit, low capacity utilisation, hyperinflation, growing parallel foreign exchange market and market distortions. 
Earlier this year, The Ministry of Finance and Economic Development said that foreign currency shortages are also associated with limited international financial support which is further imposing immense pressure on the economy.
The socio-economic crisis resulting from the foreign currency shortages and inefficient foreign exchange market has also impacted on the lives of ordinary Zimbabweans. They bear the brunt of negative growth estimated at -6.5% in 2019, rising unemployment and wage erosion, drawing the majority into poverty. 
When COVID-19 struck, there has been a sharp increase in the demand for foreign currency to procure necessary supplies and equipment to fight the pandemic. Zimbabwe still has an obligation to repay the longstanding debt burden to external creditors, putting additional pressure on the national fiscus and foreign currency in particular.