Zimpapers Logo

Golden Sibanda

The new foreign exchange management regime to be introduced by the Reserve Bank of Zimbabwe (RBZ) next week, which is based on an auction system, must have operational rules that inspire market confidence in order to work effectively, key business leaders have said.

The RBZ said the new Foreign Exchange Auction Trading System comes into force on June 23, 2020 and replaces the fixed exchange rate regime adopted in March. Prior to adopting the fixed rate regime, the RBZ had used an interbank market system, which had faced a lot of challenges.

A statement signed by RBZ Governor Dr John Mangudya says the bidding platform shall be the Reuters Foreign Currency Auction Platform that will be linked to a Computerised Export Payments Exchange Control System (CEPECS).

Dr Mangudya said the adoption of the Foreign Currency Auction System will bring transparency and efficiency in the trading of foreign currency in the economy.

Essentially, auctions of foreign currency from Tuesday next week will set the official exchange rate with approved importers bidding on the platform through their banks for the foreign currency.

Zimbabwe has since February 2019, when it exited a US dollar dominated multi-currency system used for a decade, been struggling with stabilising the exchange, with its reintroduced local unit depreciating exponentially against the greenback.

For an economy dependent on imports for an estimated 60 percent of goods consumed in the country, including raw materials, the sustained loss of value of the domestic currency has unleashed runaway inflation, which has vaulted from a lowly 5,39 percent in October 2018 to 786 percent by May
2020.

Zimbabwe’s biggest business lobby groups, the Confederation of Zimbabwe Industries (CZI) and the Zimbabwe National Chamber of Commerce  (ZNCC), said although it was still early days to tell with certainty if the auction system will work, they were sure it will fail if it does not inspire market confidence.

CZI vice president Mr Joseph Gunda said while it was too early to call, it was critical that the new auction-based foreign exchange management regime facilitates efficient distribution of the scarce hard currency.

“We are still interrogating it as business, but the expectation is that it must be able to avail foreign currency to those who need it from those who have it, that is the ideal thing.

“The expectation is that it must allow forex,which is outside of the formal system to come into the formal system, this is what we need to fight so that all the money in the parallel market comes into the formal system,” Mr Gunda said.

Mr Gunda said the domestic economy had suffered extensively from lack of confidence, as such the new auction-based forex system is expected to inspire confidence that buyers and sellers can trade on the basis of pure market forces.

He said if the system inspired market confidence, exporters can bring their forex and get a rate they can be happy  with, the more foreign currency would flow into the market.

Often, the market feels authorities have not used transparent and efficient market based foreign currency allocation distribution frameworks, including some that left the with sub-economic exchange rates.

Mr Gunda said the current arrangement where the central bank operates with a fixed exchange rate of 25 to 1 against the US dollar had a negative effect on business as it compromises the viability of exporters.

“The one who is exporting is saying is it worth it to give away my money (foreign currency), and what value do I get?” he said.

ZNCC chief executive Takunda Mugaga concurred with Mr Gunda saying the new foreign exchange system must inspire confidence, adding that a similar arrangement in back in 2004 had suffered a still birth due to lack of market confidence.

“What will drive the auction system to be successful is not the design or structure of the auction, it is inspiring confidence through policy,” Mr Mugaga.

“If you don’t put fuel into a car,  no matter how beautiful the car is, it will not move,” he said.

He said for as long as there is no confidence and trust in the auction system, the new foreign exchange regime may not produce the desired results.