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Friday, January 27, 2023
HomeBusinessForex Auction Allots US$ 3.6 Bn Since Inception But Bids Rapidly Dwindling

Forex Auction Allots US$ 3.6 Bn Since Inception But Bids Rapidly Dwindling

The Reserve Bank of Zimbabwe (RBZ) has disbursed a cumulative total of US$ 3.6 billion to local businesses through the foreign currency auction since its introduction in June 2020.

The auction was set up to stabilize exchange rates and increase local enterprises’ access to hard currency at a time foreign currency was scarce.

In its latest foreign currency allotments update, the RBZ said total cumulative foreign exchange auction allotments since inception up to end of September 2022 stand at US$3 576 330 70.

For the month of September, 210 beneficiaries of US$46 025 206 were allotted under the Main Foreign Exchange Auction while 623 beneficiaries of US$8 423 473 were allotted under the SMEs Foreign Exchange Auction.

The bulk of the auction allotments during the month of September 2022 (70%) was for payment for raw materials (US$24 354 190) and machinery and equipment (US$13 539 236), with the remaining 30% of the total allotments going towards payment for services (US$6 622 942), consumables (US$4 480 355), retail and distribution (US$3 437 518), pharmaceuticals and chemicals (US$1 426 649), packaging (US$521 533) and fuel, electricity and gas (US$66 2550).

Despite its positive impact in availing foreign currency to local firms for production for the greater part of its existence, the auction is fast losing significance due to increased dollarization in the economy.

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Since the start of August, the number of companies bidding for foreign currency has drastically dropped and foreign currency allotted has significantly declined from averaging US$ 45 million per week to current average of US$ 11 million.

Last week, there were just 186 bids on the auction from both the SME and Main auction. In contrast, on 22 February 2022 auction, a total of 1474 companies put bids at the auction.

“It’s a sign that the auction system is dying. It is no longer serving a purpose,” said economic expert, Professor, Gift Mugano.

“The economy has dollarized hence companies are accessing adequate foreign currency supply from local sales and there is no motivation to go to the auction. We notice that there has been growth in exports by local companies which tells you that companies are retaining foreign currency.”

Zimbabwe’s exports were up 31 percent to US$ 3.3 billion in the six months to June this year from US$ 2.52 billion same time last year.

According to some experts, the auction system is adding to the challenges of price distortions of the local currency already grappling the local market.

Currently, the official rate is derived from the interbank market where the Zimbabwe Dollar is valued at ZW$ 628.56/USD, and then there is the RBZ auction rate of ZW$ 628.19/USD and an array of parallel market rates ranging between ZW$ 680-820.

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It’s only until in recent weeks that the interbank and the RBZ auction rates have converged.

In August, the RBZ Governor, Dr John Mangudya said the bank had abandoned the foreign exchange auction system as a mechanism for price discovery and will use the interbank market rate instead.

It means that the auction system rate now purely serves as an allocation mechanism for foreign currency in the domestic economy for use by local firms.

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