Proponents of the new foreign currency exchange auction system celebrated on Tuesday as it produced a slow, by Zimbabwean standards, depreciation in the exchange rate against the US dollar. Just a 3.2% slide in the rate from 63.74 to 65.88. This suggests a maturing of the market in their eyes. Perhaps even a prophetic streak if you call back to when Reserve Bank Governor John Mangudya announced the auction system and its creeping rate. There may be more to it though.
Just a few highlights to look at in the auction. The highest bidder was 90 which will still have the authorities a little worried but some people really need to pay their invoices and must guarantee their outcomes. Lowest bids were around 30 but these saw no action. The lowest matched bids were for 55. It’s not clear why but it is likely that the funds were placed up for auction by private bidders who had set a reserve rate of 55. This week’s currency shortfall was 14.3%. 0.3% up from the previous week’s shortfall of 14%. The reports were that a lot of bids were disqualified for duplication which is plausible but seems very weird that astute businesses which can calculate a foreign currency bid price would duplicate bids. Lest we forget the exchange rate situation is a symptom of foreign currency shortages, which are so far not being addressed. Even if we choose to call the 14.3% shortfall low there are still all those people who are outside the market who have to turn to the parallel market. We also have new classifications for amounts allotted. No raw materials and equipment this week, perhaps their needs, at least for the moment were satisfied and space is opened up for other bidders.
It’S Cold Out There
Pardon my winter pun but it is cold out there, outside the auction system. The reserve US dollar inflation pricing that I mentioned should be expected as a result of retailers being bound to show US dollar and Zimbabwean dollar prices using the auction-rate has spawned another side effect. The short version is an item you know costs US$2 will be quoted at ZWL$300. Using the auction-rate (68.55) that is US$4.38 which is utter madness for US$2 item. However, when presenting US dollars at the till the retailer offers you a surprise 45% discount and you pay US$2 This leaves customers with US dollar payment as the best option especially if they are aware of or if the retailer practices a spot discount. Now US$1 bills are so coveted on the streets they attract a 10% premium from money changers who aren’t short on ideas. Selling 100 US$1 bills for US$110.
Still Not An Effective Rate
The biggest problem with the blind auction rate is that it is still not an effective rate. It is normal in markets to have varying closing prices. Sometimes the range of these prices is called a spread and prices are normally found in this range. Our auctions have very huge spreads. The first auction spread on bids was 74.5 (100-25.5)and the second was 54.18 (92-37.82. This week the spread was 60 (90-30). At each turn, not all bidders were satisfied so it tells us that there is still great variance in the market due to shortages. The shortfalls we calculate are of accepted bids and do not include those with rejected bids or those who could not bid at all. Until the market allows funds to flow freely between bidders and sellers, using the auction-rate will be as good as using the 25 as the rate.
We must remember the real problem is the availability of foreign currency. Holders are discouraged by conditions from letting it go. Buyers are forced to chase it at whatever rate because of conditions. Street money changers are selling small bills at a 10% premium because of conditions. Mangudya himself has been on record many times saying we have enough foreign currency in the country but it is not allocated well. Whose job is it to allocate it?