The auction rate, the weighted average of successful bids on the Reserve Bank of Zimbabwe foreign currency auction for productive businesses, fell from $173,2685 to the US dollar last week to $258,5404 yesterday.
The interbank rate, which is set by banks on the willing buyer and willing seller principle, reached $284,9378 yesterday, about 10 percent higher than the auction rate. That premium is expected since the rules of currency use and source are more relaxed on the interbank market. The May 7 reforms allowed deals up to US$5000 a day for both buyers and sellers, although maximum weekly limits were imposed.
On the auction, only bids between $220 and $300 were allotted yesterday, with the bulk of bids missing the bus although valid. This means that bids under $220 were considered too low and the extreme range of the allotted bids must have been far wider among the valid bids, those presented by bidders whose purpose was quite proper and whose paper work was perfect.
The previous week all valid bids were allotted on the main auction and almost all on the SME auction, meaning anyone whose bid met the conditions set for bidders was allocated currency, which has been very common recently. When the Reserve Bank rejects bids under a particular figure it is normally passing a message that the rate needs to rise to meet real market conditions.
Yesterday only 50 of the 407 acceptable bids on the main auction and 135 of the 1015 acceptable bids on the SME auction were allotted currency. In volume terms only US$5 604 709 was sold on the main auction and US$1 240 118 on the SME auction. The total of almost US$6,845 million was the lowest since near the very start of the auction system in 2020.
Yet acceptable bidders on the main auction put in bids for just over US$42 million and those on the SME auction for just under US$9 million. Usually around US$30 million is sold each week on the auctions, sometimes a little less recently with more Zimbabwean agricultural raw materials and new Reserve Bank rules to cut out dodgy bidders.
While the basket of measures announced 10 days ago to stabilise the economy included a policy that all allotted bids would be funded within 14 days and that only what was available for sale would be sold at each auction to prevent any further backlogs, the small sums allotted yesterday must be well below what is available for sale considering the growing export revenues from the Zimbabwean economy.
This implies that the sudden jump was more of a one-off correction, imposed as a single jump, rather than a creeping fall spread over several weeks. Next week there could some modest change as a lot of unsuccessful bidders from this week seek to get an allotment, but most are likely to keep their bids within reason looking at the minimum and average bids for this week as a guide.
The fact that the top bidder in the main auction paid $299 for their US dollars and the top bidder on the SME auction paid $300, since successful bidders must pay what they bid, shows that there was uncertainty in some circles. On the other hand, a group of bidders bought their currency for $220, well below the average. The range though ws far wider than usual.
The jump is unlikely to have much, if any, effect on prices since almost all businesses switched to the black market rate in their pricing, some using the excuse of the auction funding backlog and some just because it was more profitable.
The black market, lacking any formal market making processes, still sees prices for a US dollar range dramatically between $350 and $450 with huge margins between buy and sell rates and a lot depending on how urgently a dealer needs cash. This has been largely constant for over a week since the announcement of liquidity control measures on May 7. The interbank market is expected to replace the black market in time.
While the Reserve Bank allowed bank lending to resume yesterday, it warned that those under investigation by its financial intelligence unit for using bank loans to manipulate currency markets remain banned and gave the strong impression that the unit was still looking hard into transactions to see just who as sending money to whom as it hunts down manipulators and speculators. The Reserve Bank remains determined to keep liquidity very tight for these groups.