THE Reserve Bank of Zimbabwe (RBZ)’s weekly foreign exchange auction, which is now the most preferred source of forex for registered importers, continues to grow in popularity among local firms following revelations that cumulative disbursements to date have reached a staggering US$1,7 billion, roughly 12 months since its inception last year.
And so the central bank expects the system to remain the major source of forex for formal businesses in light of the stellar performance of Zimbabwe’s external sector in the first half of 2021, after foreign exchange inflows jumped 29 percent to US$4 billion.
A transparent and orderly way of trading forex, the auction is open to everyone for legitimate foreign exchange transactions through the bids, which are submitted through banks by individuals and entities that require the forex.
Presenting the2021 Mid-Term Monetary Policy Review Statement on Thursday last week RBZ governor Dr John Mangudya said the auction system had ensured uninterrupted financing of importation of key raw materials and equipment for productive sectors of the economy.
Dr Mangudya’s statement largely reviewed the outturn of monetary aggregates in the first six months, with virtually no major changes, as the current policy package has yielded desired results.
Encouragingly, the system continues to support the productive sectors of the economy with more than 70 percent of foreign exchange allotted going towards these critical sectors.
In terms of the funds breakdown, Dr Mangudya said 43 percent went to raw materials, machinery and equipment, 8 percent to retail and distribution, 7 percent to services, 10 percent to consumables, 6 percent fuel, electricity and gas and 7 percent to medicals and chemicals. Companies in the manufacturing sector accounted for 17 out of the top 20 weekly auction system beneficiaries during the period under review, which was launched on June22, 2020.
“Capacity utilisation in the manufacturing sector has, as a result, increased from 36 percent in 2019 to 47 percent in 2020 and is expected to further increase to above 61 percent in 2021,” he said.
Increased capacity utilisation by domestic industry players has resulted in an increase in the demand for foreign currency on the RBZ administered foreign exchange auction system.
The auction, which attained its first anniversary on June 23, 2021, has contributed immensely to building transparency in the trading of foreign currency and stability of the exchange rate, which has culminated in price stability.
The auction, complemented by monetary and fiscal discipline, has anchored the low inflation, which reached a post-2009 high of 837 percent in July 2020, after the annual rate fell to 56,4 percent in July 2021 from 108,6 percent in June 2021.
After 56 main and 50 small to medium enterprises (SMEs) auctions, a total of US$1,72 billion had been allotted as at July 27, 2021, representing 98 percent of total bids submitted to the currency trading platform.
Reflecting on the importance of the SMEs sector, the share of allotments grew from 3,5 percent in the third quarter of 2020 to about 14 percent in the second quarter of 2021.
Ramping up of production has been made possible by the increase in investment, after the auctions outlaid around US$325 million, which has been utilised by businesses to capitalise their operations.
Dr Mangudya pointed out that the response by the manufacturing sector to the auction system had been encouraging with 65 — 70 percent of products in the retail sector now being produced locally.
The introduction of the system has led to significant leap in import substitution while other entities have managed to venture into the export market, positively impacting Zimbabwe’s external sector performance.
Happy with its positive impact thus far, the RBZ is continuing with the system and says it is determined to strengthen it to ensure that it reflects economic and market fundamentals of supply and demand.
“The Bank shall, therefore, continue to foster compliance and enhance monitoring of the Foreign Exchange Auction System,” the central bank governor said.
The central bank chief said the bank had put in place appropriate measures to deal with the residual foreign exchange auction allotment backlog, which at one point was estimated to have reached US$200 million.
These include utilisation of the existing letters of credit facilities for the importation of strategic commodities and capital goods to lessen the demand on the foreign exchange auction system.
Further, RBZ is supporting banks to promote financial intermediation by leveraging on the current long foreign exchange position of around US$1,7 billion in the banking system.