Forex auction loses price discovery role

LIVINGSTONE MARUFU

 

The Reserve Bank of Zimbabwe (RBZ) has dumped the foreign currency auction system as a price discovery mechanism as it caves in to criticism that the platform was fuelling arbitrage opportunities.

The flouting of the Dutch auction rules has led to the ineffectiveness of the platform which almost converged with the parallel market before August 2021.

In his mid-term Monetary Policy Statement, RBZ governor John Mangudya said the auction system will be available to serve businesses only.

“…the foreign exchange auction system is no longer a price discovery mechanism but instead the most ideal allocative platform of foreign currency in the domestic economy given the geo-political constraints facing the local banking industry to establish an efficient interbank foreign exchange market,” Mangudya said.

He said the auction remains a critical platform on which industry and commerce access foreign exchange and the bids will continue to be guided by the exchange rates obtained on the willing-buyer willing-seller foreign exchange trading platform and by the availability of foreign currency.

Multiple analysts said the flouting of the Dutch auction rules by the authorities led to the inefficiency of the auction system and swelling of the forex backlog as there was no appetite to up bids since the lowest bidder could get the money ahead of the highest bidder.

The calls to dump the auction system as a price discovery mechanism grew louder in the past months as captains of industry who were supposed to be served by the system were not finding the  need to participate in it as it could take up to 11 weeks to settle allotments.

Economist Gift Mugano told Business Times that the recent pronouncements give testimony that the auction system is on its way out.

“It was coming that they will dump the auction as it did more harm than good to the business,” Mugano said.

He said the two will not converge when Zimbabwe has a controlled market.

“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,” he said.

Mugano said business will continue to use the parallel market to benchmark prices.

In its submissions to the Treasury and the central bank, the Zimbabwe National Chamber of Commerce said the government has lost trust in the auction system.

“Settlement of Foreign Currency Tax Obligations in local currency at the 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 foreign currency auction system has been facing challenges in allotting the forex as the central bank was auctioning what is not available. This has seen the backlog swelling.

Mangudya said RBZ will clear the backlog of foreign currency allocations amounting to US$169m before year-end after missing several deadlines set by President Emmerson Mnangagwa.

“The central bank has cleared the backlog of all allotted amounts in respect of Auctions FX94 to FX102 to enhance market confidence and is in the process of settling the ring-fenced backlog from main auctions 83 to 93, amounting to US$169m, with a view to clearing it within a short space of time,” Mangudya said.

Matsheza welcomed the development, imploring the central bank to clear the backlog “as quickly as possible” to help companies increase production.

Oil Expressers Association of Zimbabwe president Busisa Moyo said there was a “huge movement” in terms of the backlog clearance as most companies recently received their forex with another chunk expected to be cleared in the next few weeks.

Since the introduction of the auction system on June 23, 2020, the central bank has so far held 104 main and 98 SME auctions.

This year alone, the RBZ allotted US$834.7m, representing 91% of the total bids submitted to the auction.

The SMEs sector continues to receive a considerable amount of funds from the auction system, with a share of about 17% in the first half of 2022, compared to a share of 11% in the same period in 2021.

The average number of bids per auction was about
1 450 per week during the first half of 2022, lower than the average of 2 000 bids per week in the fourth quarter of 2021.

The reduction in the number of bids is attributable to the introduction of the willing-buyer willing-seller foreign exchange trading mechanism.

 

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