The Sunday Mail
The dramatic correction in exchange rates last week — caused first by the severe shortage of Zimbabwe dollars, and secondly by the smarter commercial banks, seeing that the US dollar was overvalued and pitching their bids lower for foreign currency — has brought relief and pricked the bubble that so many were determined to create.
The next step must be a fall in most prices as manufacturers are able to access lower-priced foreign currency through their banks. More importantly, most need to realise that the price of a US dollar is not fated to rise continually and so fiddle their local currency price by forward rate guesses.
While movement in prices can be expected quickly, especially in retail outlets where retailers simply convert at official rates, there will be some delays in other areas. There is old stock already paid for and manufacturers with raw materials paid for when the US dollar was at its most expensive.
But these delays should not be long and consumer organisations, the consumer council itself and us as individual shoppers should keep our eyes wide open. It will pay even more, as businesses adjust to the new normal, to shop around both between retailers and between brands.
It is important to recognise that the fall in the price of a US dollar, the strengthening of the Zimbabwe dollar, was due to pure market forces and was not a decree of the Reserve Bank of Zimbabwe or the Ministry of Finance and Economic Development. In fact, the exchange rate is now driven very largely by the 19 private sector banks, who sell most of the foreign currency their business customers need above what they earn themselves, but with some direct purchases on the smaller auction by a small number of major importers.
The major reforms introduced in the exchange rate climb over the last few weeks have made the markets totally dominant. For a start, the weekly auction was cut to US$5 million on offer, and if bids were greater than that sum, bidders were allotted currency from the top bidder downwards until the US$5 million was finished. The rest went without.
Bidders here are companies seeking currency for imports, with only the larger companies allowed to buy direct on the auction. One modest extra reform has been to allow all large companies to bid so long as they have not earned all the foreign currency they need.
The bulk of the foreign currency is now sold in another auction run at the same time, although two extra wholesale auctions have been run, one last week. Here, a lot more foreign currency is made available, most of the remaining surrendered export earnings, but only the 19 commercial banks are allowed to bid. They are buying the US dollars they will then sell to their customers who are net importers.
The actual interbank rate is set by the combined dealings of the 19 banks. While the auctions reset that rate when they occur, on most days, the interbank rate is also a weighted average. Each bank sets its prices for what they pay for and sell US dollars. Each day the banks report in with their rates and the amount of currency business they transact and the weighted average mid-rate becomes the interbank rate. With most foreign currency now going through the banks this is the serious rate.
At the moment, there is a significant range between the rates each bank uses, although all will be trying to narrow the gaps. There is at least one bank, for example, which paid well over $7 000 last week for US dollars on the first auction, and there is a bank that managed to pay just $5 263,16 in the second auction on Thursday.
Presumably, the bank that paid well over the current weighted average is desperately trying to buy some cheaper money to dilute the high-priced currency, after its executives made the fundamental error of assuming the Zimbabwe dollar would eternally fall in value, while at another bank, the head of the currency trading is being treated as the most valuable employee for getting it right.
The value of the Zimbabwe dollar moved up last week in all three auctions because no one had that many Zimbabwe dollars. The importers auction only managed to sell just under US$800 000 of the US$5 million on offer, with all bidders getting what they paid for. The bankers in their two auctions still only managed to find enough local currency to buy around US$12,8 million of the more than US$25 million available, despite the leftovers from the first auctions offered again two days later. This shows that the other reforms, preventing any creation of new local currency, have also worked rather spectacularly. We stress, last week, there was a lot more foreign currency available than local currency to buy it. So, the Zimbabwe dollar strengthened more than 17 percent. The markets made that decision.
It has also been seen in the black market. Dealers do not have local currency and are paying ever less for US banknotes, in fact, less than most banks. A lot of dealers are now stuck with some expensive US dollars they will find hard to sell at the price they paid.
People have been demanding a proper market system for the official and legal dealings. They got it. That saw the double correction, first the overvalued local currency losing value, then when some assumed the trend could continue forever but they found out they were wrong. The local currency will still make some more gains, but with banks and markets now aware of the need to do sums properly, we can expect rapid progress to the normal markets we see in most countries.
