The government should abandon the foreign currency auction system following its failure to help industry extricate themselves from difficult situations,analysts have said.
They said the system has failed to be a price discovery mechanism. 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$258.54:US$1 at the auction system, ZWL$286 at the interbank market and ZWL$450: US$1 in the parallel market.
“If we don’t recognise it as an official rate for taxes, forex retention threshold and retail trading it means the authorities have put the last nail to the auction system coffin.
“To them auction is no longer recognised as an official rate platform hence it will not serve any purpose to anyone,” economist Gift Mugano told Business Times.
He added: “In any way why are we having an interbank system, we have this system because the auction has failed dismally.
“It was never the government’s intention to have an interbank because banks were not cooperating, now they are going back home because the auction has failed.
“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.
Mugano said people will 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 three markets moving in different directions. The parallel market rate will be ahead followed by interbank and lastly the auction system.
“The major reason the interbank can 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.
In its submissions to the Treasury and the central bank, the Zimbabwe National Chamber of Commerce confirmed that the government has lost trust in the auction system.
“Settlement of Foreign Currency Tax Obligations in Local Currency at Zimbabwe Revenue Authority at willing-buyer willing-seller rate denotes a public confession by the government that the auction system rate should not be considered when pricing goods and services. What it entails is that businesses should consider prices from a true price discovery process,” ZNCC said.
“The re-introduction of the Interbank Foreign Exchange Market entails that we now have three prices for the local currency as determined on the foreign exchange auction system, the interbank forex market and the parallel market.
“It’s also a fallacy to anticipate that the interbank rate and auction rate will converge overtime since the auction has been the loophole for arbitrage opportunities. There are two options to consider here; either liberalise the main auction or adopt the interbank market completely as we graduate towards a willing-buyer willing seller model,” reads part of ZNCC submissions.
In its latest market intelligence report, the research firm, Morgan & Co also said the three markets for the local currency will create arbitrage opportunities in the market and worsen the situation.
“There are still three prices for the local currency as determined on the foreign exchange auction system, interbank system and parallel market forex system. We contend that the auction rate remains a major loophole for arbitrage opportunities,” Morgan & Co said.
Mugano described the suspension of financial institution lending “as giving poison to a patient”, adding that government spending is causing inflation.
“The big question is this: Is the current practices of lending and those who are participating in the parallel market part of the moral hazards and the major driver of the runaway exchange rate?
“In my analysis I found out that this is the major driver but the government spending,” he said.
“When you look at the national budget 34.5% of the national budget which is about ZWL$334bn is going to capital expenditure for the construction work and we have 12% of the total budget which is around ZWL$116bn going towards agriculture, combined ZWL$450bn going towards the two sectors.
“Therefore this drives inflation in such a way that when this money is being released by the government to pay the private players, they are going into the market to buy forex on the black market hence the rate will not stabilize as long as the government continues to release the money of such magnitude.
“The banks have no such huge amounts to borrow from clients, it’s the authorities who are releasing such amounts,” Mugano said.
“What government would have done was to allow the commodity exchange to take centre stage in financing and marketing agriculture commodities to reduce pressure on the parallel market.
“The government should take a back seat and focus on addressing market failures in the agriculture sector as opposed to high funding of the sector. I also thought that the government would begin the long term financing of the construction industry without using budget funds to finance infrastructure development.
“I would describe the suspension of lending as undertaking fasting at home at a time when you don’t have food at home,” he said.
Economists said they were surprised that all the measures by His Excellency there were no measures that were cushioning the economy against the external shocks with a particular focus on Russia-Ukraine war effects to the country.
They expected that the government would eliminate some of the tax heads on fuel as 50% of the prices are going to taxes.
Government was advised to cut down taxes as fuel price is one of the major drivers of inflation in addition to the exchange rate.
Economists contend that the government should have removed tax from all foreign currency transactions to encourage forex banking but instead increased tax which would drive most formal business not to bank forex.
This will also push the cost of doing business and this militates against building confidence.