LIVINGSTONE MARUFU
Captains of the industry and multiple analysts say the government should overhaul the foreign currency auction system to bring desired results amid fears the platform could become a cheap US$ accrual hub.
This is against the true Dutch system, which promotes competition among bidders.
The Reserve Bank of Zimbabwe (RBZ) in August announced that it has resorted to using the auction system as an allocative platform rather than an auction system.
The call by business comes after the Finance and Economic Development minister Mthuli Ncube (pictured) said the foreign currency platform would be revamped to reduce the widening gap between the official exchange rate and the parallel market exchange rate.
Confederation of Zimbabwe Industries (CZI) president Kurai Matsheza said the flouting of the Dutch auction rules has led to the ineffectiveness of the platform and fuelled arbitrage opportunities.
“There is a need to do a total fine-tuning of the forex auction system to represent the true characteristics of a Dutch auction system.
“As we can see, the authorities have done some piecemeal adjustments to the platform but it is still a long way to go to become the real auction platform.
“By doing these small changes, we still have a lot of arbitrage opportunities that some firms and individuals are capitalising on to make money,” Matsheza said.
The business said the auction system has failed to extricate the industry from forex challenges.
Instead, they said, it has become a forex rationing mechanism.
Its failure has forced the government to adopt the interbank market, meaning the country now has three forex markets namely the auction, interbank and parallel market.
The Zimbabwe dollar was this week trading at ZWL$1888.80:US$1 at the auction system and above ZWL$3000: US$1 in the parallel market.
“This means the interbank rate has not achieved the desired results hence they are pushing for the perfection of the auction system once again,” an analyst who commented on condition of anonymity told this publication.
Economist Gift Mugano recently weighed in: “They will only converge if they follow the real Dutch auction system where you take the highest bidder price as the benchmark for the auction rather than taking the average price as done by the RBZ.”
He said people would continue to use the parallel market to benchmark prices.
“They must notify people in advance because one can’t bid in the darkness and only if they follow the rules of the real Dutch auction system will they someday converge.
“You will see all the exchange rates moving in different directions. The parallel market rate will be ahead followed by other exchange rates.
“The major reason the interbank can’t converge also is that there are some controls that are still there. There are some limits of how much one can trade whereas there is no limit on the parallel market rate,” Mugano said.
Businesses said the interbank rate system has been a disaster as it failed to act as an exchange rate discovery platform.
“An improved auction system is a better platform than an interbank where some people just sit down to decide the exchange rate.
“This may be the reason why the official rate is 50% lower than the official rate,” Matsheza said.
The Zimbabwe National Chamber of Commerce president Mike Kamungeremu said a lot should be done to ensure formal exchange rate platforms are effective.
“The monetary authorities should perfect both auction exchange rate platform and interbank exchange rate platform to reach price discovery level and near convergence level with the parallel market,” Kamungeremu said.
