Zimbabwe parliament asks for daily, not weekly, forex auctions (Analysis)

20 Septembre 2020

Harare, Zimbabwe, September 20 (Infosplusgabon) - The Parliament of Zimbabwe says the central bank should increase the frequency of foreign currency auction to daily rather than weekly to further strengthen the 'stability' of the Zimbabwe dollar (ZWL).

Over the last three weeks, the ZWL has appreciated against the US dollar to a current exchange rate of US$1:ZWL81,71 on the foreign currency auction that was launched on June 23.

This appreciation is due in large part to COVID-19 lockdown measures, limits on mobile money transactions and daily transfers as well as efforts to contain the money supply growth through reserve targeting by the central bank.

As a result, debate has raged on whether the ZWL appreciation is genuine or just circumstantial.

“RBZ (Reserve Bank of Zimbabwe) can increase the frequency of auctions per week after successfully getting it off the ground. Lessons can be drawn from Angola which started with weekly auctions and gradually gravitated to three times a week before increasing to daily auction,” said the Parliament in its new 2020 Mid-Year Monetary Policy Review.

“Effective implementation is key to success. Supply side interventions are now critical to ensure uninterrupted forex supply. The mistakes of 2004 where the auction system degenerated into an allocation system should be avoided.

“Interference with the market mechanism and monetary indiscipline lead to inefficiencies that will cause the total collapse of the Auction System as well as failure to defend the local currency.”

Parliament said monetary authorities should worry about stability of the exchange rate and not worry about the value.

In the World Bank update for Zimbabwe, released last month, policy missteps—lack of effective fiscal-monetary-forex policy coordination and significant quasi-fiscal activities by the central bank—undermined the de-dollarization effort.

This was after the greenback was banned in favour of the ZWL as the sole legal tender in June 2019.

But, as a result of the ZWL continuing to lose value, Treasury reversed the ban which led to the US dollar being reintroduced to be used alongside the ZWL in March.

Despite the move as the economic principle Gersham’s Law states "bad money drives out good" since the ZWL continued to devalue demand for the US dollar has significantly fallen.

This is because most people have opted to hold on to the greenback while regional travel restrictions, as a preventative measure against COVID-19, for cross border traders have limited how much existing foreign currency is taken out of the country.

In an article written in a local newspaper,  NewsDay, on October 5, 2016, it was revealed that an estimated US$1,15 million was exiting the country daily through cross border traders.

Further, the waning economy has made it difficult for businesses to sell goods due to disposable incomes shrinking against hyperinflation, resulting in reduced consumer spending and thus revenue to raise money to import raw materials for companies.

In terms of policy, the RBZ has significantly capped daily monetary transactions, limited mobile money usage and implemented controls on reserve money growth which has hampered parallel market forex dealers’ ability to offload US dollars as there is insufficient ZWL.

All these factors have reduced demand for the US dollar forcing holders of foreign currency, in some cases, to use some of these monies in the formal sector.

“The auction system must be supported by comprehensive reforms. Fiscal balance and tight monetary policy must be implemented to support it. Countries that successfully implemented the auction system, later on merged it with the interbank market or used it in tandem with the interbank market,” read part of the Parliament paper.

“The Monetary Authorities should, through the adopted Reserve Money targeting system, continue to fight inflation. Exchange rate stability will be achieved when economic agents perceive the local currency as a store of value.”

Another recent measure to support the foreign currency auction is the RBZ mandating that 20 percent of all locally generated US dollars earned by companies will be liquidated on the platform.

In July 1985, the World Bank released the paper titled ‘Exchange Auctions: A Review Of Experiences’ that analysed exchange auctions in Uganda (1982-85), Sierra Leone (1982-83) and Jamaica (1983-85).

In this paper, it found that before looking at the particular features of forex auctions, it is useful to highlight the conditions under which it compares favourably with the alternatives.

“In contrast to an administrative rationing system, an auction uses prices as a mechanism for rationing the available foreign exchange. A regime of increasingly restrictive administrative allocation of foreign exchange generally is viewed as more damaging to the resource allocation process and more encouraging to rent seeking behaviour than a price rationing mechanism,” part of the World Bank research reads.

As such, the RBZ’s weekly forex auction continues to leave the exchange rate and the value of the ZWL well behind the parallel market which stands at about US$1:ZWL110 or ZWL120.

“There is a need to decentralise the auction system to be managed by commercial banks and allow the gap between the auction rate and parallel rate to close so as to encourage forex liquidation in the formal market,” reads the research report from Parliament.

Parliament, however, acknowledged that liberalising the foreign exchange market was a gradual process rather than an overnight issue.

“The central bank must ensure that winning bidders on the auction market get their foreign currency on time to squeeze out the parallel market,” said the research paper from Parliament.

Experts warn that while the government has seemingly ‘stabilised’ the value of the ZWL on the foreign currency auction, its stability will depend on the sustainability of the platform as the fundamentals to stabilizing the ZWL are still not present.

These fundamentals are sufficient foreign currency or market confidence backing for the ZWL.

If the fundamentals were in place the supply of foreign currency on the forex auction would increase as the main supplier still remains the RBZ, which was recently confirmed by central bank governor John Mangudya.

“The government should take advantage of this window of opportunity regarding this stability (ZWL) to now strengthen the fundamentals to foster growth in production and productivity,” financial expert Persistence Gwanyanya told PANA.

He said the true picture of the ‘ZWL stabilising’ would be seen as COVID-19 restrictions locally, regionally and internationally were lifted.

Increased productivity would lead to more exports and job creation thus increase foreign currency and consumer spending, respectively, enough to support the ZWL.

In its absence, the economy may be forced to fully dollarise, an assertion made recently by former Finance minister and current Harare East legislator, Tendai Biti.

FIN/ INFOSPLUSGABON/ARD/GABON2020

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