Foreign currency auction to fuel black market – analysts

By Edward Mukaro
ANALYSTS have branded the Reserve Bank of Zimbabwe’s move to implement a Foreign Exchange Auction Trading System, as noble expressed concern as its regulations might only serve to fuel the thriving of illegal foreign currency exchange in the black market.
In a statement released to the media, the central bank announced plans to implement a formal market-based foreign exchange system, which will be operational from the 23rd June 2020; a move the central bank expects to bring transparency and efficiency in the trading of foreign currency in the economy.
One of the regulations states that; ‘the auction will only accept bids for a minimum amount of US$50.000 and a maximum of US$500.000 from each bidder per auction’.
Speaking in an interview with The Business Connect, economic analyst Cornwell Muzhanye said the central bank’s move is commendable, but was quick to note that the move had some shortfalls, which were likely to spoil the bank’s intentions with the foreign exchange auction, while at the same time fueling the black market.
“The intentions of the central bank are good, but very much insufficient based on the fact that the economy of this country is much pivoted on SMEs, so putting a minimum bid of US$50.000 is a regrettable misdirection, which hinders the way to obtain foreign currency to the informal sector, meaning the sector will resort to illegal means or informal means of obtaining foreign currency, thus negatively impacting on the success of the foreign exchange trading system.
“The limitations put there actually allow for the growth and boom of the black market, for example, a minimum bid of US$50.000 is somewhat misguided basing on the current economic meltdown. How many companies or individuals will be able to raise such?
“Also, if individuals or companies are considered on the auction floor once a week, that’s disastrous in the sense that, the policy does not take into account urgent business transactions that arise in-between, meaning individuals or companies will resort to the black market which doesn’t have limitations, thereby making the efforts of the central bank futile,” commented Muzhanye.
He added that, despite its flows, the auction may work for a short period, but also noted that such moves should be after consultations with stakeholders in the economy to prevent disaster.
“It can work as a short term measure to a lesser extent though because the aforementioned issues provide loopholes, which will actually be exploited to the detriment of the policy. Thus it is critical to have an all stakeholders meeting before arriving at such decisions, as they can be a receipt of disaster themselves.
Another prominent economist, Vincent Musewe was more optimistic about the auction system saying it is better than the current status quo, but also called for efficiency to prevent fictitious rates if the system is to survive.
“The auction system is simply better than the fixed-rate, where the market is going to determine a weekly rate.
“The auction must be efficient so that we don’t get fictitious bids to push the rate up or down.
“It has to be very efficient to reflect exactly what the market wants,” he said.
Musewe added that the auction would however not obliterate the black market as it has its own rules and demands at play.
“It does not mean the parallel market is going to disappear. It has its own rules and demands.
“As far as I am concerned, it’s a move in the right direction, but it’s not going to obliterate the black market.
Early this year, the central bank introduced a fixed USD exchange rate for all transactions pegged at US$1 – ZW$25, but due to market forces, both locally and internationally, the black market has thrived as individuals and corporates, at times, resorted to the black market where rates have been market-based.

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