The first foreign currency auction for the year 2020 occurred on the 23rd of June and there were a few things to note. The Reserve Bank of Zimbabwe chose to abandon the fixed peg of 1:25 with the greenback that had only been around for close to 3 months. The new system, according to the Bank would bring some sanity to the foreign currency situation in the country. The market settled on a weighted average exchange rate of 57.36. However, there were some interesting takeaways from the auction.
Only 10 million was available
Zimbabwe’s foreign currency needs every month amount to around 110 million dollars excluding fuel which will add another roughly 120 million per month. So for a market that needs US$260 million a month or US$65 million a week to avail only US$10.34 million is a worrying sign. Granted one of the main sources of currency on the market, the funds exporters are expected to surrender after 30 days, was likely not part of this auction so there is hope for it. This will probably be the number to watch going forward.
Only 11 million in bids
Only US$11 million worth of bids were announced and this too is of concern. There are a few reasons why such low bidding could’ve occurred; the high minimum of US$50000, bids being rejected at dealer level and lack of demand which highly unlikely. Whatever the reason is this bidding level is highly unlikely to last. Perhaps a wait-and-see attitude gripped other market players who may feel energised after seeing today’s results.
Where the money went
The graph shows the sector distribution of the initial auction amount and it tells a story. Just over 50% of the money was allocated to Raw materials and machinery. This is a positive sign. On the other end of the spectrum, Medicals were allocated only 0.48% of the money available. Perhaps this is symptomatic of the invoice system which the Reserve Bank chose to base bids on.
With the weighted average rate coming in at 56.37 Zimbabwean dollars for a Zimbabwean dollar the thing to watch will be pricing. How will the retailers respond to this? Also, the SMEs and other retailers who were left out of the auction by the prohibitive minimum and the invoice requirement will still have to access foreign currency on the parallel market with rates there believed to be north of 100. Interesting times ahead.