THE Reserve Bank of Zimbabwe (RBZ) says it will announce policy measures to buttress stability of the auction system and exchange rate when it delivers the Mid-term Monetary Policy Review this week.
Monetary authorities, however, continue to reiterate that low production is causing a disproportionately high demand for foreign currency, which is putting pressure on the exchange rate.
RBZ Governor Dr John Mangudya said the apex bank was impressed by how the auction market had stabilised the exchange rate and, consequently, prices since the launch of the auction on June 23.
Before adoption of the auction system, the value of the local unit had been depreciating markedly against the foreign unit, especially on the parallel market.
While the Zimbabwe dollar exchange rate has moved from $25 to US$1 under the fixed rate regime, to $82 to US$1 after the last auction on Wednesday, it once reached highs of $120 to US$1 on the parallel market before the auction system was introduced.
The black market rate has since dropped to between $95 to US$1 and $100 to US$1 owing to multiple interventions, which also included a clampdown on abuse of mobile money platforms.
The RBZ believes the official and parallel market exchange rates are likely to converge over the next few weeks, as the auction becomes the biggest source of foreign currency for all registered businesses.
A fortnight ago, the central bank introduced a foreign exchange auction market for small and medium enterprises, a move set to weaken the black market.
The previous continued slump of the Zimbabwe dollar forced many businesses to adopt a forward pricing mechanism by putting steep premiums on prices.
As a result, inflation skyrocketed to a post-dollarisation high of 785,6 percent in May this year, from a lowly 5,4 percent in 2018.
Dr Mangudya said exporters continue to contribute through the current surrender requirements.
However, economist Mr Eddie Cross said most holders of foreign currency, were not participating in the auction but doing deals with banks at rates above the weekly weighted rate.
The banks, he said, were trading an average of US$3,5 million per day.
It is believed that were the funds channelled to the foreign currency auction — whose weekly trades average between US$14 million and US$18 million — this could materially help to sustain and entrench it.
Bankers Association of Zimbabwe president Ralph Watungwa claimed that everything that banks do is transparent and above board since they are regulated by the RBZ.
Mr Watungwa said since banks operate within the confines of specific dealer margins determined by the central bank, it was impossible to violate regulations without inviting the wrath of the regulator.
Dr Mangudya said although the auction system will continue to be sustained by foreign currency liquidated on the market by exporters, low production remains a major challenge.
There are concerns that the country is “unnecessarily” losing the much-needed forex by importing commodities such as maize and wheat that could be produced locally.
“We are pleased with the performance of the auction. The Reserve Bank has been very clear though: we have bemoaned the lack of productivity in this country; we have no productivity; that is the problem, it is not foreign currency.
“We do not produce to self-sustain ourselves. How do we import maize and wheat in this day and age?
“The RBZ continues to bemoan lack of productivity to self-sustain ourselves so that the foreign currency we are using to import maize and wheat is used to feed the auction system,” said Dr Mangudya.
“We need 30 000 tonnes of wheat in this country every month. That is about US$12 million, which we are removing from the auction, and maize we need about 100 000 tonnes per month; that is about US$28 million, which we are removing from the auction.
“So you can see already that more than half the country’s forex requirements per month go to import basic food commodities in the form of grains and therefore you want to reduce that to put money on the auction.”
The RBZ believes that the major objective of the auction system was to ensure price stability.
“So, by removing, mitigating, or minimising the volatility in the exchange rate means we achieve our mandate of price stability as a central bank. So all that we are fostering is price stability.
“Another variable that comes from us as a policy is our cautionary stance towards money supply. You are aware that we have something called monetary targeting framework. Our monetary targeting framework is that we are very stringent on money creation; so there is less creation of money in this country; that is why we publish the statistics every Friday for people to see,” he added.
Dr Mangudya said if money supply is reduced, it cannot drive the exchange rate, which is a cautionary approach to the creation of money that ensures that the Zimbabwe dollar retains its value once there is very limited liquidity to chase foreign currency.
“Prices have not gone up for the past eight weeks following the introduction of the auction and the sustainability of the auction is guaranteed by ensuring that the forex coming from the exporters is liquidated to continue to liquefy the auction,” Dr Mangudya said.