Another week, another auction, another round of depreciation of the Zimbabwean dollar. The foreign currency auction system was supposed to give us a stable rate and as things are looking that’s not going to happen anytime soon. The weighted average rate for Tuesday the 21st July was 72.1470, a 5.5% slide from the previous weeks 68.8879. As the saying goes the devil is in the details.
The auction system, despite its obvious shortcomings, is the only official rate we have. The Reserve Bank has tried to sow seeds of confidence in the auction system. As a pilot, it has shown that, as Reserve Bank Governor Dr John Mangudya has claimed many times, we do not have a foreign currency shortage, we have a foreign currency allocation problem. The steady growth of the auction in terms of bid volume is a testament to this. Yesterday’s auction had a total of US$20 million in bids, just shy of double the total bids at the first auction.
The most interesting highlight this week and for weeks to come will be that lowest accepted rate. While we have seen a very sharp decline in the highest bid rate and we can see the spreads are shrinking and converging, it is undoubtedly the lowest accepted bid rate (grey) that is influencing the weighted average exchange rate (green) the most. This week’s lowest accepted bid was higher than last weeks weighted average rate. Another important statistic in the graph is the deficit, the percentage of bids that were not matched (dark blue bars), which we’ve been tracking from the auction start. As long as we have a deficit we can continue to expect the rate to move upward, the fact that we have a gradual increase in the deficit points to the problem continuing. That said the supply side has done well considering where we are coming from.
The weighted average rate reaching the 70s is also an important hallmark because the parallel market rate for cash is hanging around the mid-70s. Historically the parallel market cash rate has been roughly at par with the interbank rate. Next weeks auction will tell us if and how well the RBZ can intervene to control or influence the exchange rate. It is believed the parallel market rate for electronic money is around 90 to 100.
So the auction system works, somewhat. Is this auction system sustainable? The Gideon Gono era auction system was only able to hold for a few months. Perhaps the present company have learned a few lessons from its shortcomings. The unfortunate thing is the rate is still not effective. Pricing will continue to be done at the rate that people accessed foreign currency. Those who are fortunate enough to access at a lower rate will likely rent-seek and price at a higher rate.