THE Reserve Bank of Zimbabwe (RBZ) on Tuesday held its second foreign currency auction in a quest to channel forex to productive sectors of the economy. It has been an eventful week for the central bank after the government’s announcement of a ban on mobile money transactions sparked public outrage. Zimbabwe Independent senior reporter Tinashe Kairiza (TK) spoke to RBZ governor John Mangudya (JM) on how the forex auction system is working. Below are excerpts of the wide-ranging interview:
TK: The recently introduced foreign currency auction system replaces the inter-bank platform and has been operational for two weeks now. What measures have you put in place to ensure that it will benefit everyone and not just the well-connected elite?
JM: The auction system has been designed in such a manner that there is effective demand. This means that the companies are the ones which are submitting their requirements in the form of bids through the bank and the Reuters Auction system.
Then all those bids come into a pool which is the auction system. And we have put parameters. The parameters are pivoted around the need to ensure that there is one bid per entity. We have also emphasised that each bid per entity should not exceed US$500 000.
Why do we have US$500 000 as a maximum threshold? It is because most of the large corporates in this country use US$2 million per month. So if you multiply US$500 000 by four weeks in a month, it will give you US$2 million. What this means is that you are basically spreading the foreign currency utilisation in the country. So you are basically looking at the likes of Delta, Varun Beverages and Schweppes.
Those are the large companies that use foreign currency in the country and they are catered for in this system. They come through their banks and make their demands for foreign currency at their rate, not the government rate. They know better what is in the market. It is a price discovery mechanism.
It is a mechanism which allows entities to tell us what they want. And what we are simply doing is to adjudicate, to tell you what you told us. So the market has spoken. You can see that is what the market is saying. There is no manipulation. Set that way, where do you see the hand of the elite, or a bureaucrat or a foreign hand? There is no manipulation; the bids come to us through the banks.
There are no bids coming from the central bank. These are bids coming from the market. And this is the fairest way of doing it transparently. All banks are participating, even those without exporting firms. The best way to trade in the economy is to have an auction system because of a multiplicity of exchange rates. With that mess, the auction system is the way to correct things.
TK: In the long term, are you confident that the foreign currency auction system will stabilise the exchange rate?
JM: Within its two weeks in operation, you can tell that there is convergence that is happening. Last week, the highest was US$1:ZW$100. This week, it is US$1: ZW$92. Last week, the lowest was US$1:ZW$25, this week it is US$1:ZW$37. So you can see the exchange rate is gravitating towards equilibrium. The parallel market rates are also going down. They shall converge somewhere. When? I do not know, because the market should speak.
TK: What are some of the challenges you have identified in the auction system and how best are you addressing them?
JM: I would not call them challenges. But I would say there is more of understanding what needs to be done among the general public. We need the entities to stick to the ground rules. One of the rules is that we do not want a multiplicity of bids from a single entity.
Entities are not allowed to bid twice in one week. We have noticed that some companies are going through several banks with similar bids. You will find out that one company will approach CBZ and ZB with a similar bid. In other words, entities are trying their chances. Companies think by so doing, the chance of getting allocation is high. That is the mistake.
Our system now, the Reuters Auction system, puts everything in one pot from all the 19 banks and sifts through. And the first thing it does is to remove those multiple bids. Those ones are automatically disqualified. Yesterday (Tuesday) we saw a similar trend. Entities were disqualified. So you cannot complain to anyone other than yourself because you do not follow the ground rules.
TK: From what you say, it appears there is greater appetite for foreign currency than the market can satisfy. Is that a correct assessment?
JM: No, the opposite is true. You see, there is a lot of foreign currency here, but people think its purpose is to store value. So they hold on to it. If you have US$2 million in your nostro account and you only want to apply for US$50 000 to buy chemicals, why not make use of your own money? People have this mentality that this is mine and I should preserve, but what is on the auction is not mine, and I must take.
TK: So, does the auction system give priority to importing firms?
JM: We are using an import priority list. This means that productive imports, which include raw materials for local production or for export production, spare parts and machinery. Those ones take priority. We remove trinkets, things that can be found here from that priority list. If you want to import carrots and potatoes, we will not give priority to that. We need to encourage local production for that. This is an auction market. You need entities that need foreign currency and entities which are selling foreign currency. We want this auction to be sustainable.
TK: Do you think the auction system has won the confidence of the general public?
JM: Confidence is earned. Trust is earned. It depends on two major issues, one is consistency and transparency. So far, following the list of companies that have participated and the number of bids we have received and allotted, it (confidence) has increased. We are confident ourselves. In the short term, and as the system continues to evolve, we project that the system will realise exchange rate equilibrium.
The forward pricing, which is what was obtaining, and was more of a hedge, will be resolved by the system. We did not know what the rate was going to be tomorrow. The system will correct that. The auction, in other words, flattens the premium curve between the official exchange rate and the black market rate. The very best about this auction system is that in the long term, it will stabilise prices. Once prices are stabilised, you can start to plan.
TK: Let us move away from the auction system and talk about the suspension of mobile money platforms. Were you consulted before the Ministry of Information made that announcement?
JM: I am shocked by that question. I think people forget easily. I think it was the Financial Intelligence Unit (FIU) that froze the agent lines sometime in March. EcoCash then took RBZ to court for an interdict. After that, the courts made a judgement. We had seen some areas of weakness in the system, especially the mobile banking platform relating to Know Your Customer (KYC). We even argued in our court papers that some of the lines were overdrawn. We raised this matter in Parliament where I said RBZ is against the abuse of these platforms. Whether it is known or unknown by the operators is neither here nor there. But what is clear is that the systems are being abused.
TK: How are the mobile money platforms being abused?
JM: It is like you are driving on a highway where other motorists are driving at 200km per hour when the speed limit is 140km per hour. Sometimes you put humps and traffic lights to limit the speed. Sometimes you can even put spikes. When I talk about Ponzi-like schemes and invisible hands, that is what we are referring to. What therefore happened on Friday when government issued a statement, we had already issued a statement because we are the ones who are supposed to operationalise it. So there is consistency within government. Someone must operationalise the statement. What we then issued was a short statement buttressing what we had already said before. Our take as central bank is that we do not need to inconvenience the transacting public who have bona fide accounts. The new changes allow us to have visibility on the transactions done by merchants. If money was going from merchant to merchant, agent to agent that is now outside the visibility of regulators. That is the major challenge of these operators. There is no visibility.
TK: There has been a significant jump in the amount of money spent by the government on subsidies. How sustainable are subsidies in your view?
JM: Subsidies throughout the world are never sustainable. That is why government made a decision to make sure that the subsidies are either eliminated or reduced to their minimum. As far as I am concerned, subsidies on fuel have been removed. We are now using the exchange rate. The cooking oil subsidy was removed long back. I think government is doing a good job in that area to remove subsidies to sustainable levels. But there is always going to be need to maintain some subsidies, as government sees it fit to accommodate the vulnerable groups in the society. If you look at government accounts at the bank now, there is an overdraft, it is in credit balance. We believe that this is a thing of the past.
TK: There is a widely held view that the increase in broad money supply has triggered inflationary pressures. How much is in circulation now?
JM: These days we are publishing money supply figures on a weekly basis so that the public can see for themselves. That money, known as (M0) stands at just below $10 billion for the whole economy. After yesterday’s auction sales, I am going to debit the accounts of banks here and money supply will likely go down to $8 billion or $9 billion. When you sell foreign currency, you absorb the Zimbabwean dollars.
TK: What are the desirable levels of broad money supply you seek to achieve, in the short term?