Business

Forex auction: industry gets US$795m to date

Oliver Kazunga Senior Business Reporter
The productive sector has been allotted US$795 million since the introduction of the weekly foreign currency auction trading system in June last year, Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mangudya said yesterday.

The forex auction system replaced the fixed exchange rate of US$1:$25 with a view to improving access to forex by the productive sectors of the economy, and has assisted in stabilising prices.

In his 2021 Monetary Policy Statement yesterday, Dr Mangudya noted that the auction system has assisted the discovery of an appropriate and stable market-based exchange rate.

“An amount of US$795 million had been allotted as at 9 February 2021 since the introduction of the foreign exchange auction system.

“A significant proportion of the total amount allotted has been earmarked for strategic sectors for imports of essential goods, especially raw materials, equipment, pharmaceuticals, chemicals, fuel and electricity,” said Dr Mangudya.

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To date, more than 70 percent of the forex allotted has gone towards importation of raw materials, machinery and equipment while other essential and strategic imports, including pharmaceuticals and chemicals, fuel and electricity have, taken around 11 percent of the total allotment.

Dr Mangudya said while the auction system has been useful, a lot more needs to be done to fine tune it.

He said the evident stability of the exchange rate, following the introduction of the foreign exchange auction system has minimised distortions in pricing by curtailing speculative pricing and parallel market exchange rate indexation of prices by businesses.

“Consequently, the parallel exchange rate premium has reduced to a tolerable band of up to 20 percent, consistent with experiences in other countries.

“In addition, the establishment of an appropriate market-based exchange rate system has assisted in dampening pressures on inflation,” he said.

Since the forex auction system was introduced, has gone through a number of refinements to improve it, taking into account valuable contributions from the market.

Dr Mangudya said export earnings have been the main source of funds for the auction through voluntary liquidations and the surrender requirements on exports and domestic foreign currency transactions.

“Of the total amount allotted on the auction to date, more than 70 percent has come from surrender requirements on exports and domestic foreign transactions,” said Dr Mangudya.

He said the upward review in the surrender ratio for exporters from 30 percent to 40 percent and the removal of the 60-day liquidation requirement on unutilised export earnings last month was meant to increase the supply of foreign currency onto the auction from the exporters, and at the same time providing flexibility in the usage of foreign currency earnings.

Working closely with banks, RBZ has resolved the glitches and payment backlogs experienced last year by some banks’ customers in the settlement of funds from the auction.

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RBZ has agreed with banks to ensure that foreign currency allotments are settled within 14 days from the date of auction.

“This clearing period will enable the bank and banks to fund the allotments and for banks to undertake the requisite background checks on their customers, where necessary,” he said.

On management of money supply, Dr Mangudya said the RBZ has continued to successfully implement a conservative monetary targeting framework to contain money supply growth, reduce pressure on the exchange rate and stem inflationary pressures in the economy.

“In this regard, the bank achieved a conservative quarterly growth in reserve money of 18,6 percent in 2020, against a target of 25 percent per quarter.

“Containment of reserve money way below the set quarterly targets is attributable to the bank’s active mopping-up program through open market operations and the strong fiscal consolidation measures that have seen Government completely refraining from resorting to the overdraft window at the Central Bank,” said Dr Mangudya.

As at end of December 2020, reserve money was $18,76 billion, compared to a year-end target of $25,20 billion.

HERALD