Editorial Comment: Second auction advances market-led growth

The second weekly foreign currency auction run by the Reserve Bank of Zimbabwe (RBZ) confirmed what the first established: that the system works, that the system is not manipulated by the authorities, and that the market set the exchange rate as importers match their needs against what exporters earn.

There was a modest easing of the Zimbabwe dollar to $63.74:US$1, a movement of just over 10 percent, as far more importers entered the process, 316, meaning more than three times as many saw the new market as the real market to source their foreign currency rather than hiring runners to scoop up dollar notes in the streets.

RBZ has not only pledged transparency in the system, but on Tuesday took the step of inviting independent observers including representatives of the Confederation of Zimbabwe Industries and the Bankers Association of Zimbabwe.

We assume they have to maintain confidentiality on some matters, such as who bid what, but are permitted, nay encouraged, to give their views on how well everything works and offer suggestions if they think more improvements are required.

The critical point about the auction system is to establish and maintain confidence.

Exporters need to be confident that they will get a fair deal, built around market forces, and importers need to be confident that they can source the currency they need to keep the wheels of Zimbabwean industry rolling and spinning a bit faster as the country grows its economy.

The gap between the top bid and lowest has narrowed as confidence grew from the first auction, but there were still those chancing their arm with an unrealistically low bid, of $37.32:US$1, and the top bid of $92:US$1 suggests that there are still people wedded to the black market and need to think about the economic fundamentals.

Ultra low bids are less of a problem. Someone shooting too low will miss out and will have to resubmit the next week with something more in line with reality.

Overbidding presents a number of problems, and in particular the prices that such bidders will have to charge their customers. If you have overpaid for your currency by a significant margin, then your customers will have to pay more than needed when buying your goods.

In an economy that is large enough this would be corrected by market forces. When there are several suppliers the one overcharging loses market share quite swiftly and learns to do their sums a lot better.

Unfortunately, the Zimbabwean economy is not yet, that big and in far too many sectors there is a near monopoly or a market divided up by two or three businesses.

Admittedly this overbidding is not the most serious problem right now. For some months those setting prices have been tracking the black market and so an overbid will not raise prices, but neither will it bring them down to a real level based on actual costs.

But it would be wrong of the authorities to even consider manipulating the market to avoid the stresses caused by overbidding; better would be for the appropriate authorities to enforce our competition rules and prevent monopolies or combinations in the first place.

And those relying on being a sole supplier should think about the result, that some more able person will see the opening and climb in.

Shareholders and others should be able to hold their managers to account. The ultimate prize in an auction system is surely to set a bid price that ensures you get your foreign currency, but that your bid was the lowest that was successful in full.

Businesses that are almost automatically viable are those that can contain costs as well as grow their markets. The auction system is still in its early days, with newcomers flocking in, so it might take a few weeks for bidders to become sufficiently experienced and confident that they can submit a successful bid within an ever narrower range.

There are still misconceptions, even among economists, if comments floating around social media platforms are anything to go by. One set of commentators are concerned over how fuels are priced considering the range of bids.  But fuel is centrally-funded by allocations from the RBZ that are not bought on the auction, but are bought from exporters at the ruling rate of the weighted average generated by the auction.

This means exporters are not harmed in any way, since all the currency that they sell is converted at the ruling rate in any case, regardless of the range in bids.

So all oil companies buy taxed fuel at the same price, with the taxed price set each week by an open formula that starts with the actual cost of landing the fuel in Zimbabwe and the ruling exchange rate.

The formula then generates mark-ups and the maximum retail prices are thus set. Perhaps this may change at some stage, and oil companies can compete on price, but until bids are in a very narrow range, less than the present oil company mark-ups, this is not a good idea.

Others are worried about the exclusion of some bids that do not make the essential import list. As almost all those imports would be for luxury consumer goods this exclusion makes sense. There are free funds swirling around and if the rich pay more for vintage wines, no one is going to shed salt tears.

The auction is designed to match importers and exporters, not subsidise the lifestyles of the ultra wealthy who seem to be able to manage and, with the auctions, can no longer impose their pricing formulas on the rest of us through black market pressures.

What the RBZ now needs to do is keep that auction system running, maintain its integrity, and thus move Zimbabweans into a real world where there are neither quasi-fiscal subsidies nor non-market profiteering.