Mangudya’s auction has made doubting Thomases believe…
By Jameson Dapi
On 23 June 2020, Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mangudya, introduced a market-based foreign exchange (forex) auction system for the country. Indeed, the auction came as refreshingly welcome news for most stakeholders, especially exporters and legitimate importers.
It became the long-awaited market-based replacement for the fixed exchange rate which, among other shortfalls, threatened exporter viability, discouraged supply to the formal forex market, while encouraging disruptive parallel market activities.
There is no price for guessing that the information asymmetry and opaqueness of the parallel market had serious knock-on effects on domestic price formation and, hence, contributed significantly to the pricing madness experienced in the country prior to the introduction of the auction.
In other words, the absence of a formal market-based forex platform had amplified the prevalence of behavioural and fear-based pricing models, instead of conventional price-setting methodologies. This inevitably came at the detriment of the country’s macro-economic stability.
As had been expected, the auction was received with a mixed bag of cautious optimism, and, in some cases, outright scepticism. At inception, the spread between the highest bid (ZW$100) and the lowest bid (ZW$ 25.5), reflected the effects of parallel market-driven information asymmetry as one economic agent believed that the fair price for the greenback was ZW$25.5 while another, in the same economy, saw ZW$100 as the right price.
The intrinsic implication of this asymmetry-induced bid spread for a trade-dependent economy, such as Zimbabwe, is that the same picture would naturally reflect in the pricing of goods and services, leading to market distortions and general instability.
Today, however, after about 10-or-so auctions, the green sprouts are there for everyone to see in the form of evident forex market price discovery. There has been phenomenal bid convergence, progressive stabilisation of the exchange rate with knock-on positive implications for relative price stability in the goods and services markets.
Foreign exchange price discovery is a major milestone for the economy. The exchange rate is one of the most important prices in the economy as its stability and predictability has serious implications for any economy’s trade dynamics, balance of payments stability, investments flows and growth.
The narrowing of bid spreads of between ZW$80 to ZW$88 witnessed over the past three auctions shows that the rate is converging between this band which is clear evidence that Dr Mangudya’s auction system has successfully achieved its key objective of setting a platform for foreign exchange price discovery to allow for sustainable, transparent and growth-enhancing forex trade in Zimbabwe.
This forex price discovery process further derives significance from the record time it took for the bid spread to narrow. In addition, it is befitting that we also fairly recognise the battery of support measures the Governor simultaneously put in place as he introduced the auction.
The success of the auction system benefited abundantly from the RBZ Governor walking the talk on monetary restraint and his welcome clampdown on errant activities of unscrupulous mobile money operators who were also fomenting forex rates and price instability in the economy.
These supportive measures, together with fiscal prudence, are the reason why for the first time in Zimbabwe, we had the formal forex market correcting in line with market forces without parallel market exchange rate running amok northwards.
Many people were very sceptical when the auction was introduced in June this year, but after the last 10 auctions, even the doubting Thomases have been overcome by the faith of the biblical Abraham. We can only commend the Governor and his team for a job well-done in introducing the auction, and far transparently running the system.
And thanks to the auction, our exporters can now breathe and hope for better times; our importers no longer need to resort to criminal parallel market activities to source forex and the generality of Zimbabweans have one more tangible reason to believe and hope again that better days are coming where exchange rate instability and inflation does not disrupt livelihoods and perpetuate suffering and poverty.
In addition, if as a country we sustain and build upon this development that has helped solve the exchange rate jinx, we are likely to see improved foreign direct investment inflows and renewed confidence in our economy.
Jameson Dapi is an economist and development, finance expert. He writes here in his personal capacity. For views and comments, e-mail to [email protected]
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