Forex auction rules flouted

LIVINGSTONE MARUFU

Captains of industry have condemned the Reserve Bank of Zimbabwe (RBZ) for flouting the foreign currency auction system rules, a move which has resulted in the forex backlog swelling to about US$350m from US$75m two months ago.

Under the set rules, the highest bidder is supposed to access the forex first. But, the rule was no longer observed. Instead, the RBZ is allowing the lowest bidder to access forex ahead of the highest bidder. Industry players said this ’kills’ the appetite to bid higher and reduces competition.

The industry leaders  said the auction system  has now been reduced to an ‘allocation mechanism’.

The increase in the backlog comes as RBZ has missed its end of March deadline to clear the backlog.

“The reason why it is not acting as such is because we are using the auction as an allocation mechanism instead of a real auction which states that the highest bidder will get forex first followed by the second till the last bidder,” Confederation of Zimbabwe Industries president Kurai Matsheza told Business Times.

“If that market price is not clearing the bids that are allocated then we have a problem because there is no motive to bid higher. This is defeating the whole purpose of an auction.”

The industrialist said a “true auction”  will be a  price discovery mechanism and settlement will happen as soon as the bids are allotted.

“There is close to US$350m backlog and there has to be a swift and practical way of addressing them and our recommendations are that whatever amount that is available at the auction we should  cede a portion towards the settling of the allotments,” Matsheza said.

“The decision of that quantum of the amount will be determined by the size of the backlog and what is available on the weekly basis that is taken to the auction so that by a certain number of weeks we should have cleared.”

Industrialist  Sifelani Jabangwe, said the auction is not giving desired results as to what was expected.

“Serious  dialogue is needed to pave the way forward,” Jabangwe said.

Economist Gift Mugano said the monetary authorities have violated the Dutch auction system rules and the system should be abandoned.

“Who is it serving when the industry players whom it should serve are saying they are not getting anything? Why should they keep it anywhere?” he asked, adding: “The authorities have violated the principles of the Dutch auction system as they don’t advise the public about how much money is available and they are not taking the highest bidder as the price for the auction system.”

“The dangers which the authorities see in suspending the auction is that they will be forced to go for the full throttle US$ which they don’t want at the moment.”

University of Zimbabwe lecturer and economist, Moses Chundu, said  the system has clearly not served  industry.

“Whilst it is a good thing to have our own currency, clearly we missed a few points on the journey to de-dollarisation and from what is obtaining on the ground we clearly had a false start and may need to consider relaunching at an appropriate time in the future,” Chundu said.

The Zimbabwe dollar is also on a free fall.  The market is rejecting the local currency,  leading to a huge gap between the formal and parallel exchange rates.

The official exchange rate stands at ZWL$159.34:US$1 against the parallel market rate of ZWL$380:US$1.

“Some of us warned right from the beginning that the issue was never about fundamentals and that advice was ignored. After causing untold suffering and losses on people’s incomes, the Governor [of the Reserve Bank of Zimbabwe] comes out and finally acknowledges it’s not about fundamentals yet continues to argue it’s working,” Chundu said.

“There are a lot of countries whose fundamentals are far much weaker than ours yet are enjoying stable currency regimes. Money is defined around confidence. Basic monetary economics tells you money can be anything and historically has even taken the form of salt and cigarettes in the prison economies.”

He added: “The bottom-line is, it has to be accepted and its acceptability is a function of whether it has the functions and properties of money and whether users trust the issuer. In our case the bank has clearly failed to protect and defend our own currency.”

“We cannot continue to blame saboteurs. What it means is they are ahead of the authorities in the game hence the lack of trust which makes it even more difficult to successfully complete the dedollarsation process.”

Last week, CZI called for the suspension of the auction system until the backlog has been cleared.

It warned that the economy was redollarising and the dedollarisation process was off-track.

But the central bank governor, John Mangudya, vowed that the dedollarisation process  will continue.

Mangudya said the contents of the CZI paper was ‘unfortunate and uncalled for’ as they have the potential of destabilising financial markets and economic stability of the country.

“The foreign exchange auction system remains in place and will not be suspended as doing so will cause shortages of goods in the market and abet inflation,” he said.