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Golden Sibanda Senior Business Reporter

THE inaugural foreign exchange auction had a flying start yesterday with applications worth US$10.35 million being allotted from bids for US$11.4 million, with the weighted average, effectively the official exchange rate until next week’s auction, being $57.3582:US$1.

Bidders offered rates at this auction run by the Reserve Bank of Zimbabwe ranging from a low of $25.50, a whisker above the frozen and now defunct interbank rate prevailing until the auction, to a high of $100, a rate even above the black market rate, for US$1.

Under auction rules successful bidders have to pay the rate they offer, so the high bidder paid almost twice as much for their US dollars as the weighted average and possibly four times as much as a successful low bidder. It is expected that as the auction system gets into its stride the gap between high and low bids will become far narrower. Sellers of foreign currency are all paid out at the weighted average.

In a ZBC interview last night, RBZ Governor Dr John Mangudya said there were 92 bidders and 91 percent of bids were successful.

Generally the jump in the official rate would not be inflationary he said, with the possible exception of fuel prices.

Businesses and shops were already, in the absence of a proper market using forward pricing, trying to predict what they would have to pay to replace raw materials and stock. So any inflationary pressure from the auction system had already been calculated into present prices.

But he was giving advice to Government authorities to allow fuel prices to be based on the new ruling rate. This would remove the opportunities for arbitrage, that is retailers buying fuel at the price based on the cheap interbank rate and selling on the black market at a price based on that rate. With proper pricing based on the auction rate, this arbitrage would disappear and so fuel would be sold on the open market.

Fuel prices are set on a formula that starts with the landed cost of petrol and diesel as it exits the pipeline from Beira at Feruka. This US dollar price is then converted at the official exchange rate, and additions are made, the largest being the Excise duty. Most of these additional costs are based on a percentage of the Zimbabwe dollar landed price.

All sales and purchases of foreign currency through the banking system will be at the ruling rate, the weighted average, for the next week with sellers probably getting slightly less and buyers paying slightly more in view of normal banking practice.

Sellers of goods and services are now expected to quote prices in both Zimbabwe dollars and US dollars, but using this ruling rate not the black market rate.

The close match of foreign currency available and bids offered is seen as the critical factor in having the successful initial auction. The wide range of rates offered in bids was seen as highlighting the problem bidders had in setting a rate for their offer with the interbank market frozen since late March and so not able to give much guidance.

The black market has been seeing ever higher rates, but this market includes speculators and currency hoarders and is subject to systematic manipulation by a small group of dealers as Reserve Bank of Zimbabwe investigations have revealed in recent weeks.

All bidders at the auction had to submit invoices that they wished to pay, to prove that the currency they were bidding for was to be used to buy approved imports or pay approved foreign suppliers, and the RBZ warned that those cheating or speculating would be banned from the auction.

Primary imports of raw materials, machinery and equipment accounted between them for more than half the currency allotted and once consumables, such as spares and packaging, and chemicals were included these primary imports took up two thirds of the allotments.

The actual allotments are in US dollars:

Raw materials                       2 883 052,05

Machinery and equipment  2 407 666,89

Food and beverages              1 398 340,00

Services        1 308 996,12

Consumables (incl spares, tyres and packaging)                1 286 995,43

Portfolio investments          436 400,73

Fuel, electricity and gas        263 147,46

Chemicals    257 015,00

Livestock      53 636,36

Medicals       50 000,00

A member of the bank’s monetary policy committee who attended the inaugural auction said: “I was there all morning. All I can say is that the process was transparent. I saw all the applications, including those that were rejected and I felt that all rejections were justified.

“Importantly, 100 percent of the successful applications for forex were funded. We had 17 banks putting in applications for forex and had several pages of applications. But every application from every individual company was settled and the average rate came in at just over $57 to the US dollar,” the source said.

Business leaders said this week that if conducted properly without interference from authorities, the auction system would enhance efficient and transparent distribution of foreign exchange and automatically ensure a tight match between exports and imports.

The auction system is funded from the retained export earnings of exporters. Under the original rules, which the RBZ has stressed it will now enforce, exporters have 30 days to sell these retentions or spend these earnings for approved goods and services but at the end of that period anything left has to be sold. Large-scale amassing of foreign exchange in nostro accounts held by exporters has been starving the official market. The bank went for simultaneous enforcement of the retention rules and offering a proper unmassaged market for the sales.

The RBZ can pad out the supply with offshore facilities it has negotiated.

Analysts believe that if the new system works as expected, it would help build market confidence, improve access to foreign currency and help stabilise the exchange rate while speculative activity on the black market could subside significantly. In any case, with a better official market normal business requirements will be met on the auction, reducing demand in the black market.

Even reputable businesses have been forced to access black market currency, directly or through middlemen, to meet import bills because the interbank market did not work as expected.

RBZ governor Dr John Mangudya said last week the auction system will operate on the Reuters Forex Trading platform, a real-time electronic foreign exchange trading system and an international standard for such systems

Under the new foreign currency auction system, bids will be submitted to, allotted and evaluated by RBZ with the offers for foreign currency while bids from buyers are submitted in the morning every Tuesday.

Confederation of Zimbabwe Industries (CZI) vice president Mr Joseph Gunda, said this week industry was highly expectant that the auction system would bring about transparency and efficiency in the trading of foreign currency, ensure market-led price discovery and improve availability.

According to the Reserve Bank, the auction will only accept bids of a minimum of US$50 000 and a maximum of US$500 000 with individuals and firms required to make a single bid per week through an authorised dealer.