This is not an auction system because the RBZ Forex Auction system does not satisfy the definition of an auction system
By Desire Muchipisi
In an attempt to stabilise the exchange rate and prices in the market, the RBZ introduced the Forex Auction System on the 23rd of June 2020 which has been operational for almost a year now. Companies are allowed to bid for USD once a week every Tuesday except on public holidays.
The rate for the week is determined using the weighted average method which is very subjective because in calculating a weighted average, each bid rate is multiplied by a predetermined weight (there is no clear formula on how the RBZ determine the rate) before the final calculation is made.
It started with a weighted average rate of ZWL 57.36 for 1 USD a figure which is silent about the lowest and highest bid of the day, ZWL 25.50 and ZWL 100.00 respectively.
The market responded with mixed feelings to the inception of the system.
It might look as if the exchange rate and commodity prices have stabilised, which is correct in layman’s view but an economist will ask questions such as “Is the Forex Auction System sustainable”?
In the long run, the Reserve Bank is the only supplier of foreign currency in an economy where United States Dollars is in short supply.
One of the main reasons the Reserve Bank introduced the Forex Auction System is to destroy the existence of the black market, but it has failed to do so and therefore the parallel market rate continue skyrocketing.
The existence of the black market is a reflection of lack of confidence in the formal market, as long as there is no confidence and trust in our financial institutions the black market will continue to strive.
In May 2020 the Reserve Bank directed all banks and Zimswitch to immediately implement a downward review of Zipit limit to ZWL20 000 per day and ZWL 100 000 per month.
When asked about the reasons for these limits, the Reserve Bank Financial Intelligence Unit (FIU) Director-General Mr W Kapofu said: “The FIU noted that the existing ZIPIT transaction limits which have no monthly cap are being misused, primarily for illegal foreign currency transactions”. Ecocash was not spared, a daily limit of ZWL 5000 a day was implemented.
In my view, these were set to reduce the amount of RTGS floating in the market so that the supply of RTGS will be low and subsequently increase its value at the same time reducing the USD-ZWL exchange rate. As a result, one will question the sustainability of the foundation on which the Forex Auction system was built on.
Another point of concern is that will RBZ be able to continue supplying foreign currency in the foreseeable future?
It is crystal clear that USD liquidity is a problem in Zimbabwe and most of the foreign currency inflows come through remittances which might reduce since many Zimbabweans in the diaspora lost their jobs due to the Covid-19 pandemic. When will RBZ stop bailing out these companies because there is no end to the cost?
To me, this is not an auction system because, the RBZ Forex Auction system does not satisfy the definition of an auction system “An auction system can be defined as a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder.
The participants should bid openly against one another but that is not the case with the RBZ Forex auction system, it is controlled or another name for a Fixed Exchange Rate regime. And the problem is that with political incentives discretion becomes ineffective due to conflict of interest and favouritism.
The RBZ should let the exchange rates and prices work and stop trying to stir them because they will eventually explode.
The RBZ should find a new way to collect foreign currency from the households after the idea of Bureau de change failed. It can do that by creating a free market of some sort where people can be able to exchange currencies at favourable prevailing market rates.
As long as the black market has more favourable rates than the official market individuals will continue to use the black market, the RBZ has a lot to do in restoring that confidence for people to believe and trust our financial institutions.
This is an easy task, people just need to be given the freedom to choose and imposing unrealistic exchange rates is far from creating that freedom.
Their Keynesian models are arranged neatly and in order but this Forex Auction System is what FA Hayek would call a fatal conceit. The exchange rate and commodity prices might appear to be stable for now but in the long run, the economy is dead.
Desire Muchipisi is a student of economics and currencies. He writes for the Sunday Express in his personal capacity.
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