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HomeBusinessFixing Forex Auction Bottlenecks Should Headline 2022 Monetary Policy Statement

Fixing Forex Auction Bottlenecks Should Headline 2022 Monetary Policy Statement

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Fine-tuning the foreign exchange auction system for an effective supply of foreign currency to local companies should headline Central Bank governor, Dr John Mangudya’s 2022 monetary policy statement expected to be presented within the next 30 days.

Despite having improved local companies access to foreign currency since its inception, the auction system has left a lot to be desired particularly when it comes to late payment of allotted bids extending to as much as 10-15 weeks.

Furthermore, the market is losing confidence in it, with allegations of exchange rate manipulation and widespread abuse of the auction system through inflation of foreign invoices, generation of fake invoices, and double dipping by businesses trading exclusively in foreign currency and diversion of foreign currency proceeds to the parallel market.

The Central Bank has not denied most of these allegations and recently by its own admission said it was being overwhelmed by bid submissions averaging 2000 per week and as a result it reviewed bid submission timelines to give respective banks more time to conduct the necessary due diligence on bids submitted.

In 2021, the auction platform has allocated US$1,971 billion to local businesses and individuals with 62 percent of the amount going towards importation of raw materials, machinery and equipment.

“This has significantly helped the local industry to stay competitive in the face of increased importation of manufactured commodities from South Africa, China, and Singapore,” said economic analyst, Victor Bhoroma.

However, the payment backlog of allotted bids remains the greatest problem authorities are faced with.

The RBZ owed approximately US$270 million as of November 2021 in unpaid allotted funds to companies.

“These backlogs provide a lifeline to the parallel market as businesses must augment auction allocations and meet production timelines. The spread between the pegged auction rate and open market rate continues to widen with the former at US$1:ZW$108.66 while the latter is trading at US$1:ZW$220,”

“The spread creates a fertile ground for market instability through price distortions and unrealistic forward pricing on future payments. The spread also means that millions in foreign currency continue to circulate in the informal sector since the formal exchange rate does not reflect the accepted free market dynamics,” said Bhoroma.

The Governor will also have to find a solution to the delicate issue of the foreign currency retention policy.

While it makes sense that the retention policy is meant to consolidate the Bank’s foreign currency reserves which will be used to lubricate the auction system, the old adage, that says, Don’t kill the goose that lays the golden eggs, may as well prove relevant.

Exporters and miners in particular have been demanding a review of the policy citing high operating costs and thin margins as a result of retaining 40% of export earnings in local currency at a very weak exchange rate of the auction system.

Currently, the official exchange rate stands at ZWL$ 112 against the parallel market rate of ZWL$ 220 against the American dollar.

To compound matters, most local suppliers of these exporters set high premiums on payments in local currency, making costs even higher and weighing down profit margins.

And of course, there are other perennial challenges such as inflation and money supply which the Central bank should also tackle.

Analysts expect the Bank to maintain its benchmark interest rate at 60% as a way to continue reigning in on speculative borrowing and money creation. The central bank last increased interest rates from 40% to 60% in October 2021.

One can only hope the Central Bank will not be tempted into increase money supply as has been the case in previous years when elections draw closer.

 

 

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