Zimbabwean banks faced significant challenges in acquiring foreign currency during the Reserve Bank of Zimbabwe’s (RBZ) wholesale foreign currency auction yesterday, as the market grappled with a severe Zimbabwe dollar liquidity crunch. Only one-third of the available foreign currency, amounting to US$10 million, was purchased by banks for onward sale to their clients out of the US$30 million on offer.
The RBZ introduced the wholesale auction as a measure to enable banks to acquire forex on behalf of their clients. It had previously guaranteed a minimum of US$15 million per week to inject liquidity into the foreign exchange market. However, the ongoing liquidity crunch in the Zimbabwean dollar undermined the banks’ ability to participate fully in the auction.
Over the past two months, authorities implemented several interventions to stabilize the exchange rate and mitigate the rapid depreciation of the Zimbabwe dollar, which had triggered substantial price increases. These measures included transferring external payment obligations from the RBZ to the Treasury, making most duties payable in the local currency, and raising the bank policy rate from 140 percent to 150 percent.
Last week, the Treasury announced additional measures aimed at promoting the use of the domestic currency, such as the payment of all corporate taxes in the local currency. For the June 2023 Quarterly Payment Date (QPD), taxpayers are required to settle 50 percent of the foreign currency portion of their corporate tax obligations in local currency. The government emphasized that it would not accept payments in US dollars or any other foreign currency for the local currency portion of corporate income tax due in the June QPD.
Market reports indicate that banks have been struggling to secure sufficient Zimbabwe dollar funding to purchase more than US$1 million at any given time since the introduction of the wholesale auction. This limited access to funds has affected their ability to participate fully in the auction and meet the demands of their clients for foreign currency.
Economist Tinevimbo Shava acknowledged the impact of demand-driving policies, stating that reduced demand would likely lead to a drop in the exchange rate. Shava expressed support for the initiative, suggesting that under the prevailing conditions, the exchange rate could settle around $5,000 to $6,000 per US dollar.
Lawrence Nyazema, President of the Bankers Association of Zimbabwe (BAZ), explained that the recent withdrawal of excess local currency from the market through fiscal and monetary measures had contributed to the scarcity of Zimbabwe dollars. Tax obligations being payable in the local currency increased demand, compelling US dollar earners to liquidate their foreign currency earnings.
Nyazema commended the current Dutch Auction System, stating that it had brought about a constant supply of foreign currency in excess of demand on the official market. He expressed satisfaction that the measures had encouraged those earning in foreign currency to contribute to the stability of the foreign exchange market by liquidating some of their proceeds.
Economist Dr. Prosper Chitambara emphasized the positive impact of creating demand for the local currency. He believed that requiring companies to settle their tax obligations in the local currency would enhance its value and stabilize the exchange rate.
As the Zimbabwean government continues its efforts to stabilize the foreign exchange market, the liquidity crunch and limited access to foreign currency pose significant challenges for banks. The success of the wholesale auction system will depend on addressing the liquidity constraints and ensuring a consistent supply of foreign currency to meet the demands of the market.-Agencies