Mangudya’s auction has cast doubt on Thomaser’s…
By Jameson Dapi
On June 23, 2020, the Governor of the Reserve Bank of Zimbabwe (RBZ), Dr John Mangudya, introduced a market-based foreign exchange (forex) auction system for the country. The auction actually came as refreshingly welcome news for most stakeholders, especially exporters and legitimate importers.
It was the long-awaited market-based replacement for the fixed exchange rate that, among other things, deficits threatened the exporter’s viability, discouraged delivery to the formal foreign exchange market, while encouraging disruptive parallel market activities.
There is no price to guess that the information asymmetry and opacity of the parallel market had serious knock-on effects on domestic pricing and consequently contributed significantly to the pricing staff experienced in the country before the introduction of the auction.
In other words, the absence of a formal market-based forex trading platform had reinforced the emergence of behavioral and fear-based pricing models rather than conventional pricing methods. This inevitably harmed the country’s macroeconomic stability.
As expected, the auction was received with a mixed bag of cautious optimism and in some cases direct skepticism. At first, the tension between the highest bid (ZW $ 100) and the lowest bid (ZW $ 25.5) reflected the effects of parallel market-driven information asymmetry, as an economic agent believed the fair price for greenback was $ 25.5 ZW, while another, in the same economy, saw ZW $ 100 as the right price.
The inherent implication of this asymmetry-induced spread of bids for a trade-dependent economy, such as Zimbabwe, is that the same picture is, of course, reflected in the pricing of goods and services, leading to market distortions and general instability.
Today, after approx. 10-or-so auctions, the green sprouts are there for all to see in the form of an obvious discovery of currency prices. There has been phenomenal bid convergence, gradual stabilization of the exchange rate with positive positive consequences for relative price stability in the goods and service markets.
Exchange rate discovery is an important milestone for the economy. The exchange rate is one of the most important prices in the economy, as its stability and predictability have serious consequences for any economy’s trading dynamics, balance of payments stability, investment flows and growth.
The narrowing of bid ranges between $ 80 and ZW $ 88 that the last three auctions witnessed shows that the price is converging between this band, which is clear evidence that Dr. Mangudya’s auction system has successfully reached its central goal of setting a platform for exchange rate discovery to enable sustainable, transparent and growth-promoting forex trading. Zimbabwe.
This forex price discovery process draws further significance from the record time it took for bid bidding to narrow. In addition, it is fitting that we also quite recognize the battery with support measures that the governor simultaneously introduced when he introduced the auction.
The success of the auction system killed off the RBZ governor launching the lecture on monetary restraint and his welcome shutdown of unfortunate activities by unscrupulous mobile money operators who also praised exchange rates and price stability in the economy.
These supportive measures, together with fiscal prudence, are the reason why, for the first time in Zimbabwe, we had the formal foreign exchange market in line with market forces without a parallel market rate in the north.
Many people were very skeptical when the auction was introduced in June this year, but after the last 10 auctions, even the dubious Thomases have been overcome by the biblical faith of Abraham. We can only praise the governor and his team for a job well done in introducing the auction and far transparent running the system.
And thanks to the auction, our exporters can now breathe and hope for better times; our importers no longer have to resort to criminal parallel market activities to find forex, and zimbabwean people have a more concrete reason to believe and hope again that better days will come when exchange rate stability and inflation will not disrupt livelihoods and perpetuate suffering and poverty.
In addition, if we as a country maintain and build on this development that has helped to resolve the exchange rate jinx, we are likely to see improved foreign direct investment and renewed confidence in our economy.
Jameson Dapi is an economist and expert in development, finance. He writes here in his personal capacity. For views and comments, email to email@example.com
IMPORTANT NOTICE: Access LIVE news, jobs and exchange rates directly on WhatsApp. Send a WhatsApp message with the word HIE to +263718636522 or just CLICK HERE to try it. iHarare is now an information one-stop-shop. Click on the links highlighted in red to access News, Events, Job, Price control, Advertise, Dating and training services of iHarare. Contact us with any questions by CLICK HERE.