The introduction of a transparent price discovery mechanism by way of the Dutch foreign exchange auction trading system on 23 June, 2020, was met with mixed views from all economic agents.
Reservations were a result of past experiences stretching back to the early 2000s when the local currency was eventually demonetised due to some policies.
Optimists learning from successful experiences in other economies favoured the new approach as a solution to the perennial exchange rate problem. The performance of the new system has already, in 11 auctions, demonstrated its sustainability going forward.
Although it will take some more time for the market to eventually grow in confidence, the results do indicate that the authorities have finally hit the correct buttons.
The shift from a pegged exchange rate system, where it was fixed at $25:US$1 onto the auction system has seen a sharp decline of the premium between the parallel and auction rates.
In fact, the two rates have expectedly converged as demonstrated by the results in particular of the last four auctions. We have seen the parallel rate falling from $110:US$1 at the beginning to the range $85 – $90 currently. The auction rate has flattened at 83 with the resultant differential between the two rates declining from 75 points at the beginning to below 5 points currently. What is more telling behind these numbers is that the movement in the differential between the highest and lowest bid rates has declined from 75 points to about 10 points currently. This signifies the strength of a converging market force.
We still observe some signs of resistance to the system though with pricing of goods at some yet to be understood its basis or rationale.
The persistent negative expectation is that the system will be unsustainable going forward. However, to date the auction system has performed satisfactorily and has become an efficient price discovery mechanism as intended.
The authorities must be applauded for constantly improving the quality of information released after each auction. At the beginning some important data such as the number of applications received, the number of applications rejected, and the reasons for rejections was not published.
As the system developed such information was added. This eliminated doubts as the system became more transparent.
There are more factors that must be acknowledged in support of the good performance of the system. Reserve Money growth has been under check and that has traditionally been the major pressure point for the exchange rate.
We have also noted that the fiscus is behaving in a disciplined manner resulting in a nominal budget surplus for the half year to June 2020. Against expectations, the Minister of Finance and Economic Development advisably resisted the pressure to chase inflation by avoiding issuing a supplementary budget in the mid-term budgetary review statement. Such a move only helps to douse the inflationary fires. Further, the performance of the external sector has been surprisingly good especially considering the impact of the Covid- 19 pandemic. The current account is showing an improving position with a strengthening trade balance from a lowest monthly deficit of above US$200 million in June 2029 below US$50 million in April 2020.
The current scenario provides enough reason for optimism. The auction system is expected to gradually allow the market to trade on its own without having to wait for the auction dates. The banks are expected to take the lead by starting trades amongst themselves for their clients mid auction dates and also with the Bereaux which should ultimately lead to continuous trades on a daily basis.
We eagerly wait for the usual industrial in order to more objectively gauge the sentiment from significant players. What can be said at the outset though is the market is already started experiencing stability on prices on the shop shelves.
Misheck Ugaro is a former expatriate banker once based in several SADC countries and currently works as a corporate advisory services consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. He is a member and past vice president of the Zimbabwe Economics Society. (263) 777052004/712808140 [email protected], Linkedin: https://www.linkedin.com/in/misheckugaro, Twitter: @twitcagan.com