Promote transparency on FX auction sessions

This week, the foreign currency auction system debuted with a weighted
average price of 57.35 to the United States dollar, replacing the largely
inefficient fixed interbank bank rate of ZWL$25:US$1, which was introduced in March this year as a temporary measure to deal with coronavirus.


The weighted rate will be in use until the next auction on Tuesday next
week.


Apart from availing the much needed foreign currency, the auction system
is also expected to curtail the thriving parallel market as companies can now buy the US dollar and other currencies on the formal platform.


The money for auction will come from several sources including offshore
loans arranged by the Reserve Bank of Zimbabwe, portions of export proceeds retained by the central bank, export earnings and remittances.


The auction system could give businesses relief, especially to exporters on
the portion of receipts they receive in local currency as the fixed interbank
market resulted in losses for exporters.


The interbank system had been unworkable considering that it trailed the
parallel market rate by a wide margin. The parallel market rate was this week trading between ZWL$80 and ZWL$100 to the dollar.


Consequently, businesses including miners and tobacco farmers have been
crying over the fixed interbank exchange rate of ZWL$25:US$1.


That the fixed rate had been unworkable was clear though it took monetary
authorities time to admit that the market is the final arbiter.


Retailers were giving shoppers a rate of 80 thereby taking the foreign
currency which would be destined to the parallel market into the formal
market.


Now, there is a huge call for transparency on how the system will be
conducted.


The central bank said the auction system, which will be conducted every
Tuesday, will bring transparency and efficiency to currency trade.


But, individuals and companies will only be allowed to do one bid every
week. One cannot bid for less than US$50 000 and the maximum has been
pegged at US$500 000, meaning the platform could be for major players.


At the end of each auction session, an average will be worked out, becoming
the official exchange rate for the week.


The system, however, is not new in Zimbabwe. Former central bank
governor, Gideon Gono, introduced the auction system.


But, that did not work out forcing Gono to abandon the system.


The central bank has to promote transparency to win market confidence.


As reported elsewhere in this paper, the central bank overpromised when it
launched the interbank market in February last year but failed to deliver.

Related Articles

Leave a Reply

Back to top button