EXPLAINER | How the RBZ’s latest forex trading system is supposed to work, if it works

(pic: Bloomberg)

Reserve Bank of Zimbabwe has announced a new forex auction system, saying it will bring “transparency and efficiency” to currency trade.

The auction system is the latest in a series of attempts by central bank over the past two years to settle on a working forex trading system.

An auction platform is not new; Zimbabwe introduced a Managed Foreign Exchange Auction System in January 2004. It was abandoned within a year, after the market realised RBZ was keen to control the rate, which resulted in losses for exporters. At the time, sellers complained that they could not withdraw their offers from the auction even if unhappy with bids.

Will the new auction system be any different?

Here is what we know so far about the new platform:

Is the rate still fixed?

The system replaces the fixed rate of 25:1, which was introduced as a temporary measure in March and has been criticised by exporters, including miners. From June 23, the rate will no longer be fixed.

How will this new system work?

According to RBZ, there will be an auction every Tuesday. Through their bank, a company or individual who wants forex, makes a bid for hard currency by 9AM on the day. They can make only one bid per day. If they bid twice, all their bids are rejected.

The winning bidder gets the money sent to their foreign currency bank account once the Zimdollar equivalent has been paid.

Importers on the priority list – essential supplies – get to be first in line for allotment.

At the end of each auction day, an average of the highest and lowest bids allotted is worked out. This becomes the prevailing exchange rate of the day. At close of each sale day, a report will be published on how much was auctioned, the bids on offer, and the weighted average rate.

The bidding platform uses the Reuters Foreign Currency Auction System, linked to the export payments and exchange control platforms. The central banks of Ghana and Uganda started using the Reuters Eikon auction app in 2016.

How much can one bid for?

To bid, you must have deep pockets. You cannot bid for less than US$50 000 per auction. This means the auction system is really for major players, shutting out individuals that may also need forex.

One can bid for a maximum of US$500 000 per auction. A factor to watch will be how much of the allotted bids is actually available. A bidder also needs to show an import invoice.

Where will the forex for auction come from?

The RBZ says the money to be auctioned will come from several sources. First are offshore facilities arranged by central bank. The bank doesn’t say if there are any new such facilities ready.

Another source is the forex brought in by exporters. When an exporter has been paid for goods they sell abroad, they are required to sell their forex onto the official market within 30 days. The bank also anticipates that holders of free funds will also use the auction to sell their forex on the market.

Does this happen in other countries?

Angola, Egypt and Ghana are among economies that use variations of the auction system. Angola, in 2018, stopped controlling the exchange rate and started auctions. This allowed the Kwanza to depreciate. The auctions began once weekly, then three times a week. They are now held daily.

Ghana also has an auction system. However, what is notable is transparency, which RBZ woefully lacks. The Bank of Ghana has already released a calendar telling the market how much it intends to sell in its forward auctions for 2020; a total of US$715 million is planned for its auctions this year.

This contrasts sharply with RBZ, where key data is released either late, or hardly at all.

What about prices?

Shops are now required to display prices of goods and services in both USD and in Zimdollars at the ruling auction rate for the week.

If you think you’ve heard this before, you’re right. This is a throwback to September 2008, when shops were licensed to sell in foreign currency alongside the Zimdollar.

Then, just as now, inflation was raging out of control. RBZ introduced Foreign Exchange Licenced Warehouses and Retail Shops (Foliwars), Foreign Exchange Licenced Oil Companies (Felocs) and Foreign Exchange Licenced Outlets for Petrol and Diesel (Felopads).

These big, clumsy names simply described shops allowed to sell in forex and Zimbabwe dollars. However, shops quickly stopped accepting local dollars, preferring USD, as is likely to happen now.

Months later in January 2009, Zimbabwe formally announced the adoption of the multicurrency system when acting Finance Minister Patrick Chinamasa presented a USD denominated budget.