RBZ Told To Close Its Failed Forex Auction System
10 June 2023
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Economic analysts this week said the central bank must close the foreign exchange auction system, saying it was no longer serving its purpose.

The Reserve Bank of Zimbabwe (RBZ) last month limited weekly auction allotment to US$5 million to avoid a build-up of backlogs.

However, economists said with only US$5 million on offer, the system was no longer useful.

“Demand for forex is certainly more than the US$5 million now available per week,” economic analyst Vince Musewe said.

Zimbabwe implemented the Dutch auction system in 2020.

It is a market-based mechanism allowing buyers to bid for the greenback.

Economist Eddie Cross agreed that the auction system was no longer relevant.

“At the beginning, the auction system for foreign exchange made a substantial contribution to the local economy,” Cross said.

“It stabilised the currency and it met basic demands for foreign exchange by the private sector.

“All bids were cleared within seven days and the majority, over 70% of the funds allocated, was for raw materials and equipment.

“In my view, had the reserve bank been able to maintain that performance, the auction system would have made a substantial contribution to the local economy.

“However, after several months of success, the Reserve Bank began to delay payments for bids and this tied up very substantial resources from the private sector and made them reluctant to use the auction as a source of foreign exchange,” Cross said.

He added that: “On top of that, they stopped expanding the floor of foreign exchange to the auction and that meant the auction no longer met the needs of the private sector. It began to lose its relevance”.

Cross noted that the auction system had been severely curtailed down, with allocations dropping to about US$20 million per week, from about US$45 million.

“I think the auction has been overtaken by events. We just need to disband it and allow a liberal system. That will help to remove distortions that are in the foreign exchange management system, which has seen the black – market premium widening,” he said.

Cross said Zimbabwe’s demand for foreign exchange was running at about US$150 million to US$160 million a week, hence the auction was now making very little contribution.

With the parallel market rate (PMR) now sitting at about US$1: ZW$4 000, Cross said it was of no doubt that the recent depreciation on the auction system was deliberate.

He said it was meant to try to narrow the gap between the PMR and the official rate.

However, he said the PMR rate had recently increased further, and the situation remained the same.

Development economist, and policy advisor Prosper Chitambara said the auction has served its purpose.

He said businesses were now mobilising their own foreign currency through the interbank market.

“Businesses can mobilise their own foreign currency requirements without having to go to the auction now,” he said.

“I think the interbank market has been working okay in terms of providing forex requirements. So, I think there may not be a need to continue with the foreign exchange auction.”

Over the past few weeks, Zimbabwe has been experiencing severe exchange rate volatilities, prompting people to call for full dollarisation.

The Zimbabwe dollar crashed by 60% against the United States dollar in May, underlining a raging economic crisis that has wiped salaries and sent prices soaring.

But in his address to delegates attending the Chamber of Mines of Zimbabwe (CoMZ) annual conference in Victoria Falls last week, Reserve Bank of Zimbabwe governor John Mangudya ruled out dollarisation, arguing the country did not have capacity to dollarise.

Cross concurred with Mangudya, saying the central bank did not have any reserves of currency.

“The Reserve Bank does not have any reserves of currency at all and neither do we as a country and it is one of the weaknesses of our monetary system,” he said.

“The government has certain reserves based on revenue from taxes, but those are very limited.”

Cross said the country was effectively dollarising, and this was likely to have a severe impact on the domestic economy.

“It is not in our interest at all to see the local dollar collapse as it did in 2008. The question is, what do we do to protect the Zimbabwe dollar and make it more representative of our average daily needs,” he said.

“For this to happen, the Reserve Bank has to stop printing money in excess of the growth rate of the basic economy and in addition we must have a market for foreign exchange, which represents the real trade situation in the country. That is not on the auction system.”