FARMERS, gold miners and other producers who have been crying foul over the 1:25 fixed interbank exchange rate have something to smile about as the Reserve Bank of Zimbabwe (RBZ) starts implementing the foreign currency auction system this week.
The new foreign exchange measures are expected to give fair value of the local currency in relation to the United States dollar.
Currency auctions are also set to curtail the black market trade in forex, as corporates can now buy US dollars and other currencies on a formal official platform that replaces the largely ineffective interbank system.
Businesses, including retail shops, are now expected to use a uniform exchange rate which must be displayed in their premises in a move that eliminates arbitrage and speculative activities in the economy.
This comes as RBZ Governor Dr John Mangudya has reiterated that all denominations under the local currency remain in use, contrary to false reports that $2 notes and coins have been phased out.
Farmers and gold producers were getting paid their local currency component at the interbank exchange rate of 1:25, at a time the rate had rocketed to around 1:70 on the parallel market.
The development led some farmers to withhold deliveries at tobacco auction floors, while similarly, some gold producers shunned the country’s official buyer of gold, Fidelity Printers.
In an interview with The Sunday Mail, Dr Mangudya said after Tuesday, all businesses are expected to adopt the auction system as the official peg of the local currency against the US dollar and other foreign currencies.
“What we are saying is very clear in that the auction market is going to receive bids starting Tuesday from an array of foreign currency users. After receiving the bids we will end up having an average rate that will be used for all official systems,” said Dr Mangudya.
“At 1:25 it was not viable. This is now going to be the market rate for all transactions for tobacco, gold, all exporters and anyone using foreign currency.
“All shops will now be obliged to display the official rate so that they can peg prices in that regard as opposed to pegging prices based on the parallel market.”
The RBZ boss said the auction system would address the double whammy of inflation and an unstable exchange rate.
“We are doing this for two reasons; firstly to flatten the inflation curve and also to flatten the curve for the rate between the official market and the black market. The rate that we will have on Tuesday will reflect what the market says because we will now have an official market for foreign currency.”
Dr Mangudya said the auction system would allow for “price discovery”, a process where the local currency finds its true value based on market fundamentals.
“What we are doing is moving towards price discovery, the market should tell us what price the rate should be at. There are currently a multiplicity of exchange rates on the market. We are going to be very transparent in managing this auction system,” he said.
The RBZ Governor said the auction system has been successful in other countries such as Egypt, Nigeria, Angola and many others outside Africa.
Asked why the interbank system had failed and whether the same pitfalls would not lead to a failure of the auction system, Dr Mangudya said: “The interbank rate was not working because banks were not trading among themselves efficiently. The banks did not have the limits among themselves because of a number of reasons such as lack of will or geopolitical factors. We have a silo-type mentality in terms of interbank relationships.
“In that context, we needed another system that was efficient given the current super structure of the banking system. The auction system is the best because we are dealing with users of foreign currency as opposed to dealing with intermediaries.”
Dr Mangudya said the introduction of the auction system will mean that there will be no need for big companies to hunt for foreign currency on the parallel market as they will now get it on the official market.
He said contrary to ill-informed suggestions, the country has enough foreign currency which needs to be properly harnessed.
“Our economy requires between US$80 million and US$100 million a month to sustain all our imports, minus fuel. Gold producers, tobacco farmers and diaspora remittances bring in a total of over US$100 million.
“So what this effectively means is that the money is there in the economy. All we need to do is to harness it so that it can circulate in our economy within the official channels.”
Phasing out coins, old notes
On the widespread conjecture that $2 notes and coins had been phased out, Dr Mangudya said those behind the false reports could be out to hoodwink members of the public.
“It’s disconcerting because at no point did the RBZ make that suggestion. Those who are behind those false reports are just bent on cheating innocent citizens. I pray that the nation can have trust in the measures that we are putting instead of relying on falsehoods.”
How auction system will work
On Friday, the RBZ uploaded the Applicant Foreign Currency Bid Form on its website showing its readiness to implement the auction system.
In a statement last week, the RBZ said the auction would be held every Tuesday with companies or individuals who want forex allowed to make a bid for hard currency by 9am on the day.
Each bidder is allowed to make submissions once a day and bids will be rejected if they are made twice.
The winning bidder gets the money sent to their foreign currency bank account once the local currency equivalent has been paid.
At the end of each auction day, an average of the highest and lowest bids allotted is worked out. This becomes the prevailing exchange rate of the day. At close of each sale day, a report will be published on how much was auctioned, the bids on offer, and the weighted average rate.
The bidding platform uses the Reuters Foreign Currency Auction System, linked to the export payments and exchange control platforms.