THE forex auction rate is now seen devaluing at an accelerating rate in the coming months, as the central bank is running out of options to sustain the system in the midst of alarming parallel market rates, high forex backlog against high demand for forex, The NewsHawks can report.
At this week’s official forex auction, the Zimbabwe dollar lost ground to the United States dollar, weakening from US$1:ZW$88.55 to US$1:ZW$90.07.
An asset management company, Imara Capital, in its Zimbabwe investment notes titled The Auction System: Devalue or Lose Relevance, said the export sector will be in dire straits, having suffered from the Reserve Bank of Zimbabwe (RBZ)’s policy to “fix” the auction rate at around ZW$87 to the US dollar when companies are having to source their input requirements from suppliers who are pricing at the parallel rate or, indeed, in US dollars.
With the parallel rate now around twice the auction rate at a time their suppliers do not want the Zimdollar that the RBZ has given the exporters (which is now half the real value), Imara said low-margin export businesses may well be the canary in the coalmine.
At this rate, companies will be an early casualty of the widening gap between the parallel exchange rate and the auction rate, as lower returns will eat into their margins, forcing them into care-and-maintenance.
“As the supply of US dollars going into the auction from our exporters falls short, then the gap will need to be filled from elsewhere. More loans from Afreximbank may be the solution albeit an unsustainable one. We believe that low-margin export businesses may well be the canary in the coalmine; such companies will be an early casualty of the widening gap between the parallel exchange rate and the auction rate as lower returns will eat into their margins, forcing them to move to care-and-maintenance,” Imara said.
“It would not surprise us if the RBZ reduces surrender requirements on a sector basis so as to ease the pressure on such businesses. In the meantime, such exporters will be using every tool in their book to avoid surrendering any of their US dollar revenues. It’s hard not to see the auction rate devaluing at an accelerating rate over the coming months; there is little to prop it up that we can see.”
Imara said the best option is to float the currency and allow the market, not the RBZ, to determine the exchange rate and for the central bank to abolish the surrender requirements on export proceeds.
The asset management company added this would be a better time to do it as the country recently got a US$961 million windfall in additional foreign exchange reserves from the International Monetary Fund. A freely determined exchange rate at a time of rising commodity prices would encourage higher exports and provide greater amounts of foreign exchange.
“Instead, and at the moment, exporters have little incentive to invest in new, let alone existing production, when surrender requirements on export proceeds remain so high in order to ‘assist’ the funding of the auction system. That policy clearly isn’t working! Maybe too, and as a means to support the Zimbabwe dollar, government should revise its tax payment policy and insist that all taxes, and, especially for US dollar earners, are paid in Zimbabwe dollars, thereby forcing businesses to sell their US dollars for Zimbabwe dollars at the free market-determined exchange rate. That should provide underlying support for the Zimbabwe dollars and give the government Zimbabwe dollars for its domestic spending,” Imara added.
As the RBZ is clearly worried about the rising parallel market rate and the backlog following its announcement last month that it would “ringfence” US dollars owed from the forex auction to importers up to and, including 14 September, Imara said there was no mention of how the backlog would be cleared or indeed how future allotments would now be met timeously.
“The IMF SDRs perhaps? Maybe Afreximbank is assisting with more US dollar loans? The latter could be a double-edged sword as these loans, as we understand, are collateralised against future exports proceeds. All in all, we would expect the auction rate to devalue over time from current levels since the RBZ has few other options left to hand,” Imara said.
Meanwhile, the government is pushing hard on its infrastructure programme with a focus on road rehabilitation and dam building being the major projects, where contractors are being paid in Zimdollars although they should be given priority at the auction to fund their US dollar inputs.
If on the other hand, the required US dollar numbers are simply too great for plant and equipment, Imara said these contractors, whether local or foreign, may have no choice, but to look elsewhere for foreign exchange and index their Zimbabwe dollar quotes to US dollar.
The same could also be said of the forthcoming agricultural season when the RBZ will be printing Zimdollars to provide to the suppliers of fertilizers and chemicals for the farmers. These same suppliers will then be looking to convert that Zimdollars so that they can import the products.