The Confederation of Zimbabwe Industry (CZI) has urged authorities to adhere to strict Dutch Auction System rules at the Reserve Bank of Zimbabwe (RBZ)-run foreign currency auction market in order to achieve market driven price discovery of the local currency.
The Zimbabwe dollar has been plummeting rapidly against the USD recently and the RBZ has laid blame on some individuals and companies who are illegally trading foreign currency for undermining its value.
The parallel market premium for foreign currency has grown nearly 100 percent to ZWL$ 170 at a time the auction market still trades at ZWL$ 88 against the USD.
CZI laid the blame on authorities for failed to make the auction market produce a price where foreign currency generators are willing to supply the foreign currency auction which has resulted in many selling at much lucrative parallel market rates.
‘(RBZ should) Implement the standard rules of a Dutch auction meaning that higher bidders are allocated in full. This will allow supply and demand to play its full role at the auction and make it a true price discovery mechanism,” said CZI in its recommendations.
“Failure of the foreign currency auction system to operate as a proper Dutch Auction system, (has) resulted in failing to produce a price where foreign currency generators are willing to supply the foreign currency auction.”
By design, a Dutch auction is a price discovery process in which the auctioneer has to start with the highest asking price and lowers it until it reaches a price level where all the bids received will exhaust the entire quantity on offer.
However, in contrast, the foreign auction market has seen most companies go for more than 10 weeks before their accepted bids are cleared.
The Bank has been also criticized for failure to declare the amount of foreign currency available for auction, a situation that has led to the bank auctioning foreign currency it does not have.
“Have a known amount to be auctioned beforehand; Assign to the bidders from the highest bids down; Allow the highest bidders to have their full amounts at the bid rate and Only pro rata bids at the lowest accepted rate in relation to the remaining amount available,” said CZI.
The industry body has also recommended that settling winning bids should be done within 48-72 hours (T+3) and this will not be difficult once the auction is based on the declared available amounts.
“The extended backlog discourages players that have genuine need for foreign currency and cannot afford to wait for six weeks while those that are importing simply due to the existence of cheap foreign currency do not mind waiting to get their bids honoured, even though they have resources tied down during the waiting period. Thus, the foreign currency auction is now attracting foreign currency demand that would normally not have been there,” said CZI.
CZI has also noted other factors behind the runaway exchange rate which includes the bulk payments to farmers and contractors of major infrastructure projects which has created a huge demand for foreign currency.
To avert the increase in money supply, experts have implored the Central Bank to adhere to its promise to keep reserve money supply to 20 percent.
Yet still, CZI warns that the current reserve money target growth rate of 20 percent per quarter is too high in compounded terms per annum under conditions of confidence erosion.
