The RBZ’s foreign currency (forex) auction system is fundamentally flawed. The government instead of blaming the black market should be looking at how they can make the auction better because it, rather than the black market, is the real reason why the economy is being held back. The black market only exists thanks to the flaws and failings of the official auction system.
In this article, I will endeavour to point out some of the issues that will need to be urgently addressed. No amount of legislation is going to solve these problems only the adoption of sound economic strategies will do.
A fixed auction
The biggest defect of the auction system is that it’s essentially rigged. Everyone likes to pretend that this is a market-based system but it isn’t. The Dutch auction system that the Central bank uses is a deliberate attempt to make sure that the rate doesn’t rise too fast. That seemed clever until reports started filtering in of how those who had won bids were not getting their allocations on time.
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These are in essence shortages which in turn give the impression that the rate is being artificially low. As I have been at pains to point out in a previous article, in a true market system there wouldn’t be foreign currency shortages if we are using a ” market-based rate.” Look at the black market, for example, you can get all the foreign currency you want as long as you are willing to pay the prevailing rate and there are no shortages. That’s what a true market rate is supposed to be like.
One cannot help but get the impression that the auction rate is cleverly fixed by the government under the guise of it being a market rate. This has been principally done by excluding “none-essential” businesses and operations from participating and the habitual disqualification of bids made by other companies. Those that are denied access have simply gone to the black market to get their foreign currency because they don’t have any other option. It’s either they fold or they go to the black market. And presented with those two options the choice is an easy one to make.
No information on supply
We only know and get total allocations after an auction has been conducted. Nobody really knows how much money is available beforehand or maybe it’s just me being ignorant. How much does the government have in its coffers? Where did it come from i.e. what was the sources?
Most of us don’t know and without information, people are forced to make assumptions and in the absence of information, assumptions tend to be mostly negative. When combined with rumours that those who win bids are not getting their money on time the inescapable conclusion is that we have foreign currency shortages. Shortages, real or perceived drive up the black market rate. The government needs to shed its aversion to transparency and share essential information.
Legal banditry and seige mentality
The government through various arms is in charge of Zimbabwe’s economy. That is a privilege that they have constantly abused to devastating effect. They constantly assume everyone else, including businesses, are out to get them. God knows why they would think such things instead of cooperating with the business sector to build the economy they are instead constantly unleashing regulatory bombs.
Not least of these bombs is the way they expropriate foreign currency from exporters at a contrived rate. They should let the market decide instead of trying to compel exporters to surrender their foreign currency they should incentivise them to willingly give up that foreign currency. Again the best way to do this is by freeing the auction instead of trying to control it.
Because of this, the business community has come to view the government as an enemy that needs to be thwarted. While the government has its weapons the business community is not without means to retaliate. Most businesses I know have stopped obeying laws they don’t like choosing instead to take some operations underground.
A lot of businesses, for example, have two sets of books. One for the regulators and one for management. The clean books are just for show. The real accounting is done in the management books. This is where management uses “real exchange” rates which are just black market rates and detail how they arrived at the prices of their goods and services. They then cook up the clean books to make sure they adhere to regulations.
With the widening gap between the official and market rate, fewer and fewer people have been willing to fund the auction. Who wants to get 86 ZWL when they can get 170 ZWL? No amount of legislation will erase such a stark difference. More laws will simply reinforce the impression that the government is cash strapped and is now employing legal banditry in order to dispossess exporters of their hard-earned forex.
If the government really believes that 86 ZWL is the current market rate as they keep saying they should put their money where their mouths are so to speak. They need to fund the foreign currency auction and make sure that everyone who wants foreign currency gets it at those rates and in a timely manner. If they cannot do that then it’s safe to say they are lying about the official rate being the correct market rate.
Restricted access and hostility against the informal sector
Despite opening to small businesses and offering $50 per week allocations to individuals the official market has remained closed to most individual players and informal businesses. The government has been especially hostile to the informal sector. When they are not overtaxing the sector they are busy banning its operations with little warning.
This hostility has been extended in the form of restricted access to the foreign currency auction. Even businesses that are given access often have this access revoked and their bids denied for all sorts of reasons. Often this is seen as some sort of punishment as the businesses are no longer allowed to feed on the RBZ trough-seems like everyone knows the official rate is too low.
The informal sector is the largest business sector in this country. When denied access the players in this sector do not go away to die. They simply go to their favourite market the black market which gives unfettered access to them. The same applies to desperate individuals who want foreign currency for various reasons. They don’t just fold their arms and do nothing. They go to the black market to get foreign currency as a necessity.
A result rather than a cause
The Zimbabwean government has been so proud of its foreign currency auction they have become blind to its many failings. Often the things they blame on the black market are a result of the official auction’s problems. The black market is a result of these problems rather than the cause. The black market wouldn’t exist or its activities would be severely limited if those failings did not exist.
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Our conversation with former member of the RBZ’s Monetary Policy Committee Eddie Cross, where he gave his opinion on the forex auction.