Home LOCAL NEWS Private sector joins forex auction

Private sector joins forex auction

Private sector joins forex auction

The Reserve Bank of Zimbabwe (RBZ)’s weekly foreign exchange auction system received a major confidence boost on Tuesday following the first ever participation of two private sector giants that sold their foreign currency on the trading platform introduced on June 23.

Since inception of the new auction system, which replaced the interbank rate introduced in February last year and subsequently the fixed rate regime adopted in March this year, the RBZ has been solely funding bids from importers, as private players and individuals sought to understand how the system works.

Both the interbank and the fixed rate regimes were abandoned after failing to gain market confidence.

While industry believes that it is still too early to judge the performance of the auction system, its notable success has been encouraging.

Market watchers, however, say its success and sustainability will be determined by the extent to which authorities ensure transparency and allow forces of demand and supply to determine the rate.

Without predictable access to foreign currency and a systematic way of determining the exchange rate, most businesses were now quoting prices well above steep black market rates in order to hedge against expected and sudden exchange rate movements.

The auction has since established a market-determined exchange rate — the weighted average of auction deals — which has drifted from $57,36 in the first week to $63,74 (10 percent) and now $65,80 (3,2 percentage points) against the United States dollar.

The total value of bids also fell from about US$18 million to US$15,8 million, while the successful bids went down to US$13,6 million from about US$16 million last week.

Private sector joins in

Economist and a member of the RBZ Monetary Policy Committee, Mr Eddie Cross, told our sister publication, Business Weekly, that they were happy with how the auction system had performed thus far given that all successful bids had been fully funded, with priority placed on essentials such as raw materials.

“I think the auction so far has worked just fine; I think some more people (exporters) are coming to the party to sell their foreign currency . . . (Tuesday) we had two organisations putting their foreign currency on the table; that was the first time,” he said.

Mr Cross said all successful bids had been settled within the prescribed period of seven days from the day of auction, a standing condition agreed with the RBZ.

“For this week’s auction (last week), all successful bids should be paid by Monday (tomorrow). In the first auction we were able to settle all successful bids within two days. I am not sure about last week (a fortnight ago), but I think we were able to do the same thing.

“If there are any cases like that, the problem we may be having is that commercial banks are not crediting clients with the money in time,” Mr Cross said.

More private players, especially exporters, he added, are being encouraged to join the auction system to sell their money.

The two private companies that joined the auction last week were able to sell funds amounting to US$500 000 at fairly good rates of $70 and $90 to US$1.

“We are waiting for the exporters to come in and I think this coming week we will start to see more players, but we have funded 100 percent of productive sector requests so far.

“I have been surprised that we have not had that many applications; yesterday (on Tuesday) we had 264, previously we had 316 and a week before that there were about a 100,” he said.

It is believed that the participation of private holders of foreign currency is likely to improve efficiency and sustain the auction system.

Zimbabwe National Chamber of Commerce (ZNCC) chief executive officer Mr Takunda Mugaga said everyone still wants to see the sincerity of authorities in allowing free market forces to work at the auction.

“If demand and supply are allowed to operate, certainly the private sector will be willing to participate.

“So prospects on private sector participation are quite promising and it’s too early to discount the auction system. We are very hopeful that it is going to be a very effective and efficient mechanism of trading forex,” he said.

Amid limited access to rightly priced hard currency, businesses had turned to the alternative market for forex that uses high and speculative rates, which resulted in exchange rate volatility and sustained increases of prices and inflation.

RBZ Governor Dr John Mangudya was optimistic that the introduction of the auction system, which now establishes a formal market exchange rate, would allow businesses to start quoting prices using the correct exchange rate.

This has already started happening in the pricing of bread and fuel, which receive foreign currency for imports at the auction-determined market rate, which has seen their prices coming down or stabilising.

Other producers and retailers are also expected to follow suit as they increasingly access foreign currency from the formal market.