Auction system efforts need to be sustained

The results of the first foreign currency auction on Tuesday should convince most that the Reserve Bank of Zimbabwe (RBZ) was running an honest market and not manipulating the outcome.

But it did exhibit, rather dramatically, the attitudes, beliefs and erroneous ideas of some fairly important people in the formal sector, the sort of people who can lay their hands on enough Zimbabwe dollars to buy US$50 000 to US$500 000 in a single day, which means they own a large company or are the CEO of a large company.

RBZ Governor Dr John Mangudya admits he was startled by the bidders who offered $100 and $90 for US$1 and thought the third highest bidder, who offered $85, as at the extreme end of vaguely rational behaviour. The bidder who offered $25.50 was on the other side pushing their luck somewhat.

Fairly obviously, the high bidders believe, as Dr Mangudya deduced, that the black market is close to a perfect market and its rates are the “real” rates, without any analysis of just where the black market sources its foreign currency and just who buys in that market.

But just why someone was willing to bet a minimum of $5 million on the belief that the black market was the real market, and to lose more than 40 percent of that sum is curious.

Few can toss more than $2 million down the tube to back up a lack of economic knowledge.

The lowest bidder was obviously expecting the RBZ to manipulate the market in a big way. We do not know if that bidder struck luck, but the fact that around nine percent of bids missed out suggests that person went without.

We would assume that the next auction on Tuesday next week will see a far narrower range of bid prices, as importers start thinking more carefully and more seriously.

The first factor is start thinking just what the auction system is meant to do, and then think seriously about the totally unregulated black market, who runs it and who buys from it.

The auction system is straight forward. It is designed to produce an equilibrium between net exporters and net importers.

Since the end of last year, Zimbabwe has been enjoying a positive trade balance, meaning that we export more than we import. This was the most critical condition that had to be met before the auctions were started.

It means that we were already to a degree in the desired equilibrium, so a transparent and market could work without any manipulation. That trade balance was largely achieved by the control of money supply and purchasing power.

In other words, importers cannot find unlimited customers for what they bring in. Most people cannot afford semi-luxuries, let alone luxuries, and Zimbabwean industrialists, who were always suspicious of dollarisation after seeing the collapse of their businesses when it as last tried, have been taking advantage of the lower costs they now incur when compared to foreign competitors, to corner large sections of their home market.

The critical point to note, enforced by the RBZ insistence of seeing real invoices for goods and services and barring those with positive nostro balances until they run these down, is that the auction is purely for trade, and excludes speculators, currency traders, exporters of capital and those wanting to fill a tin trunk with US dollars for a rainy day.

The black market is different. There is a deep dark suspicion that a small group manipulate this market for a start, but even if they do not source, most funds are diaspora remittances and the buyers are all those barred from the auction, from speculators to hoarders, although ordinary businesses were in effect also tapping this market to pay foreign suppliers, either directly or through less squeamish middlemen.

So the two markets do not match and never can match. With the blocks of legal importers now moving, in all probability, to their bank managers rather than seedy people “offering the deal of a lifetime” a block of buyers in the black market will be pulling out, and that will either stabilise that rate or even cut it.

It might take several auctions to establish the true market rate that keeps exporters and importers in equilibrium, but the weighted average is unlikely to move dramatically since it seems a majority of bidders had done their homework and were bidding fairly close to the final rate, all those looking at $40 to say $65 or $70.

So prices should at worst stabilise, since no one likes price cutting, or at best start falling as some in a competitive market go for market share by pricing according to actual costs plus a profit margin, rather than sucking their thumb and thinking of the number that might be the exchange rate in a month’s time.

The end of the last notable quasi-fiscal subsidy, the exchange rate for fuel, has seen diesel and petrol prices rocket. But the fuel costs in a truckload of say baked beans is around 2 percent of the total costs, so this should not have a noticeable effect on prices. Car owners will be hit hard, but they can cut consumption, benefiting the country, and can even start thinking about Zupco or at least looking at smaller cars.

The other potential problem is that bid minimum of US$50 000. As normal banking operations resume, small importers should be able to buy from their bank at close to the ruling auction price, with the banks buying the small lots from other customers.

But if this is a serious concern, at least in the short term as ordinary banking markets are recreated, the RBZ should look at banks amalgamating invoices from a batch of customers, doing the know-your-customer checks to ensure speculators are banned and that no one has a healthy nostro balance, and putting in a combined bid.

There are other solutions, but there is nothing inherently wrong in the big boys, who dominate the markets in any case, setting the price through their bids and the smaller businesses going along for the ride.

In general, the RBZ started well. It now needs to continue on the same lines, letting the market forces set the exchange rate, while it moves into a central bank’s true roles of setting the rules and by careful use of reserves smoothing out the peaks and troughs without damaging the transparency and integrity of the market.