The Reserve bank of Zimbabwe successfully held its second blind foreign currency auction of the year 2020 and there are as usual some taking points from it. After swift government action, it feels strange to write that, closed mobile money and the Zimbabwe Stock exchange on Friday the new week was always going to be a weird one. The Reserve restricted mobile money agent transactions but let all functions continue while the ZSE was shut for Monday and Tuesday. The blind auction produced some interesting results, chief among them a new and higher weighted average exchange rate at 63 Zimbabwean dollars for a single US dollar.

New week

Perhaps the most fitting metaphor to the week was the ZSE posting a Monday Motivation message on twitter even though the Exchange was closed. Finance Minister Professor Mthuli Ncube is reported to have said investigations are underway. Surely the SEC’s job but I guess we are way beyond whose role it is to do what after the letter from Nick Mangwana on Friday. Mobile money was operational for peer to peer and payment transactions but reports in the news state that parallel market traders were hard-pressed for liquidity leading to a decline in those rates though this could not be ascertained.

New rate

The second blind auction occurred yesterday. As I’d surmised in my preemptive piece that explained the system we would see a lower high and a higher low, probably greeted by authorities as good news. What would received so warmly was the uptick in the rate. From the inaugural 57.36 to a new 63.74. A 13%jump in one week? This is starting to look familiar, isn’t it?  However, the new rate has the same problems as the old one. It’s not the effective rate. The distribution of the foreign currency below depicts some huge shifts in the distribution of the money. Medicals are up to a healthier percentage while LPG is listed alone. Machinery and Equipment seem to have fallen right off in demand.  through the overall volume of US dollars sold on the market increased from 10 million dollars to 16.3 million dollars, falling around 2 million US dollars short of bids. This weeks shortfall was 14% of the bids compared to last week’s 9% shortfall, this will be a key number to watch going forward.

New Rules

The RBZ’s monetary policy committee released a new set of rules to go with the new auction system yesterday. However, they chose to start with an appeal to holders of foreign currency to provide foreign currency for the auction at their preferred reserve prices. This should surely be explained. The apex bank raised bank lending rates to 35% from 15%. The rates had been lowered to provide affordable loans for businesses dealing with the fallout of COVID-19 response lockdown which result in slow business for many. Seeing victory with the reduction of liquidity on the parallel market the RBZ may want to take this same approach to the ZSE and other parallel market players who borrowed speculatively.

The Apex Bank also announced Open Market Operations. Likely a move to replace the seemingly defunct Treasury Bill Auctions government will borrow through open market operations. If successful at attracting investors the instrument will kill two birds stone sapping further liquidity out of the market. The instruments will be linked to the auction rate and will pay 5% per annum with durations of between 30 and 360 days.  While Zimbabwean dollar-denominated they would protect against currency depreciation on the official market though at present they lag behind the parallel market rate of depreciation. Reducing liquidity in the market, in the form of money that has nothing better to do (no other way of preserving value) than buying foreign currency on the parallel market or shares on the ZSE is an effective attempt but the government would have to play its part by arresting money supply growth which has proved very difficult in the last 5 or so years.

New Prices?

Yes! New rate, new prices. This is to be expected and circular were going out only a few hours after the auction announcing some businesses were indexing prices to the US dollar at the auction rate. So this is going to be with us for so long as we have a volatile rate. However, the flaw in the auction rate cannot be ignored, nobody in that auction paid 63.74 for one US dollar. There will be clear winners and losers from a pricing perspective and we are likely to keep seeing what look like crazy US dollar prices that some retailers will happily discount at the till so you pay the real US dollar price. For example an item you know costs US$2 will be quoted at ZWL$300. Using the auction-rate (64) that is US$4.69 which is utter madness for US$2 item. However when presenting US dollars at the till the retailer offers you a surprise 58% discount and you pay US$2. Get used to this.