The Reserve Bank of Zimbabwe released Foreign-Exchange-Related-Matters—24-July-2020 that spoke on a few matters including the foreign currency auction, foreign currency legacy debt and Statutory Instrument 185 of 2020 which brings into force dual pricing in foreign currency the Zimbabwean of all goods and services by business owners. The highlight being the way SI 185 mandates the use of the auction weighted average rate, which is not an effective rate, as the conversion rate for pricing. This has memories of observers harkening back to the attempted price controls of the past.
US$71.1 million auctioned so far
The statement makes mention that US$71.12 million has been distributed so far through the auction. US$71 110 614.96 to be exact. Falling short of the total bids of US$85 273 198.58 by US$14 162 583.62 or 16.61%. This looks commendable at first but when you consider how many businesses and informal operators are sidelined from the auction it paints a grim picture. The RBZ attempted to explain the distribution of the money. The graph below shows us that the big winners in the auctions are Raw materials (32.52%), Retail (12.43%), machinery & Equipment 11.78%. Meanwhile Mining (0.23%, Construction & Engineering (1.46%) and Agriculture (3.08%) languish.
Legacy debt payment plan
The statement also addressed the issue of legacy foreign currency debt. The bank’s position is that foreign currency bids for legacy debts and blocked funds are being rejected because they are currently working on a plan to address these, possibly outside of the auction system.
SI 185: Dual pricing
Statutory Instrument 185 of 2020 amendment, which was also published on the 24th of July was mentioned in the statement. It brings into effect the dual pricing requirement and also states penalties applicable for those found not following the law or using a rate of exchange other than the weighted average auction foreign currency rate of the week. This move akin to price control as most if not all retailers are not buying foreign currency at the weighted average rate. It is a very tough ask of a retailer or any business person to price at a rate lower than they bought foreign currency. Even those who bought foreign currency in the auction system. Last week’s results showed that the lowest accepted bid rate keeps pushing up and this is likely because of private holders of foreign currency who are placing funds up for auction at their nominated reserve rates. As this lowest accepted bid rate continues to push up the rate will go higher as the graph below depicts.
Petroleum companies to bank forex
Petroleum companies were not left out of the statement as there have been a few changes noted in the market thanks to the foreign currency auctions. They are also required to show dual pricing at the official exchange rate. Does this mark the end of Sunday late-night fuel price circulars from ZERA? Petroleum companies have also been instructed to bank all US dollar receipts.
The imposing of an exchange rate that is not effective is no different from imposing an unrealistic price. We have been there before as a nation. Price controls ultimately hurt the consumer as retailers move products from shelves to the black market where consumers must pay steeper prices. Perhaps the RBZ should work on making the foreign currency auction system more inclusive. They have the foundations of what could be a good system with holders of foreign currency seemingly willing to sell on the market. We’ve already seen retailers respond by hiking Zimbabwean dollar prices which gives a higher price in US dollars as well when the auction rate is applied.