The Reserve Bank of Zimbabwe’s (RBZ) auction system has always been a contentious subject. The foreign auction system commenced in June 2020. The auction system’s main thrust has always been to avail foreign currency to key industries. This is because most of the crucial inputs are imported. It has been evident from the onset that the auction system is not so smooth. The lack of transparency and abuse of allocated funds have been some of the recurrent issues. Since the auction system was introduced over 2 years ago, more than US$3.5 billion has been allocated. Today our discussion is centred on some top banks and firms abusing allocated auction funds.
Some Banks And Firms Are Abusing Allocated Funds
The RBZ has been periodically conducting onsite visits to banks and firms getting allocations from the foreign currency auction. This is meant to establish whether or not those entities are using the funds appropriately. There are Exchange Control regulations that they should comply with. It has since emerged that some banks and firms are misusing the funds. In some cases, it is actually individuals who are misusing those funds. One of the most common forms of misuse is arbitrage. This involves getting a tradable item (in this case, foreign currency) from the auction system and then selling it simultaneously on the parallel market. The goal of these offenders is to profit from the differences between the two markets.
RBZ’s Exchange Control Division Recently Put Together A Report
They recently issued a report on the 5th of September, 2022. They highlighted that they paid (and are paying) a physical visit to all entities getting foreign currency allocations from the auction. It emerged that some entities failed to account for the funds they got adequately. In response, the RBZ penalized all the entities that were found wanting.
Part of the report read as follows:
“Exchange Control continues to conduct on-site compliance inspections on companies throughout the country funded through the auction. From January 1 to date, one hundred and nine (109) companies have been inspected. The on-site post-auction validations aim to account for auction funds utilization to confirm receipt of value in the country. Exchange Control has continued to levy administrative penalties on importers who fail to account for auction funds fully.
In addition to on-site company visits, Exchange Control is conducting on-site and offsite inspection on banks. The exercises are meant to check whether banks are administering exchange control transactions consistent to policy. Exchange Control has fined errant banks for various violations (including) failure to pay funded auction allotments within 72 hours of funding by the bank (RBZ). With eight months into the year, the foreign exchange situation remains favourable, and forecasts point to a good foreign exchange position at the end of the year.”
The Report On The Positive Fruits Of The Auction System
The report also highlighted that the auction has been bearing fruits. In essence, they attributed the increased foreign currency receipts to the auction system.
This is what they had to say:
“Total foreign currency receipts for the period January 1 to August 31 2022 amounted to US$7.698 billion compared to US$5.815 billion received during the same period in 2021 representing a 32.4 percent (US$1.874 billion) increase. This affirms the significant growth in the level of receipts over the period. This tremendous growth in total foreign currency receipts was largely driven by a 41 percent growth in exports (US$1.475 billion) over the period.
This amplifies the continued dominance of exports as a major source of foreign currency receipts, as they contributed about 65 percent of the country’s total receipts for the period. Foreign Investment, particularly FDI, though still low, has registered a significant increase of 202 percent from 2021 of which 62 percent (US$20 million) of the foreign investment amount was invested in Energy Sector (Zimbabwe Electricity Transmission Company and SinoHydro Hwange Power Holding) from SinoHydro Corporation Holding Zambia.”
It is interesting to note that a major chunk of the FDI has been invested in energy. Yet currently, the electricity situation in Zimbabwe is problematic. Anyways, the foreign currency auction still has lots of issues of concern. In June 2021, the RBZ named and penalized several entities abusing the auction system. Check out the RBZ Names Foreign Auction Abusers article I did then. More than a year later, we still have the same issue happening. That definitely means the auction itself and the compliance frameworks are porous.
