A day can be a very long time when dealing with a crisis as Jordan Peterson wrote in 12 Rules for life. We have seen this first hand as the government of Zimbabwe made two big announcements that will change things, on the 17th of June. Civil servants and government pensioners were to be paid US dollar allowances while the Central bank announced it will move to an auction system for foreign currency in a bid to improve the foreign currency allocation in the country. Two big questions emerged of the latter; what is it and will it work?
To briefly explain the auction system it will run once a week on Tuesdays, starting on the 23rd of June. The auction is open to individuals, companies and other organisations. The auction will take bids between US$50000 and US$500000 and bidders are limited to one bid per auction day. Bidders submit bid through their banks who will be required to collect bidder information including substantiating information such as an import invoice and the current bank balance of the bidder. The auction will allocate US dollars to bidders based on the already existing foreign currency priority list. Amounts will be allocated based on the highest bids and will descend down the order until the currency in supply is exhausted. From these allocations, a weighted average exchange rate will be calculated through the electronic Reuters based platform which will also be connected to Computerised Export Payments Exchange Control System (CEPECS) and Computerised Exchange Control Batch Application System (CEBAS). Successful bidders are expected to pay for allocations a day after the auction date with the US dollars being transferred to their bank accounts the following day, 2 days after the auction. The weighted average exchange rate will be the official rate used in pricing and shops are hereby required to price items in BOTH US dollar and Zimbabwean dollar to prevent deviation from this rate. The auction will be funded from export proceeds and 30 days use it or lose it liquidations if exporter US dollar balances. In addition to this funds will be availed
Nothing new here
The auction system is not a new idea. Former Reserve Bank Governor Gideon Gono introduced an ill-fated auction system in 2004. Auction systems have been used in several countries including Russia, Azerbaijan, Jamaica, Ghana and Angola. The auction is usually recommended as a transition mechanism from a fixed exchange rate to a free market exchange rate. The key to these auction systems working is of course transparency and a simple system and you get the feeling that our soon to be auction system will be anything but.
In a nation where, at least on the parallel market which was the most active, exchange rates moved daily a weekly auction is likely not the answer. The RBZ would, of course, like to slow down rate movement. Perhaps the plan is to increase the frequency after getting it off the ground. The minimum entry-level means that a huge chunk of the market is excluded from this market and once a market does not serve people a black market opportunity is created. Even an individual buying a used car from Japan below the value of USD50000 is excluded from the market. This move will therefore not likely lead to any demise of the black market. The requirements such as export invoices will further exclude market participants. After all the exclusions we remain with a few big players. The funding of the market is also questionable. The document says “offshore facilities arranged by the bank”. Are we borrowing hard currency for auction? We have done it before.
Flattering to deceive
Is this another complicated piece of paper that will not have a large effect on the majority? The chances are high. A feeling of de ja vu with the announcement of the interbank system and how it was supposed to be a liberal market exchange rate are understandable. The authorities have a proven history of flattering to deceive. Zimbabwe has a huge informal economy and any system that does not include them has very slim chances of succeeding at anything.
All in all, anything is better than the currently unrealistic 1:25 peg. Well, almost anything. There is a chance things could get worse or not change at all under this system. Time will of course tell.