Evaluate the effectiveness of the Foreign Auction System used by the Central

Bank in Zimbabwe.

The Reserve Bank of Zimbabwe (RBZ) re-introduced the Foreign Currency Auction System on
the June 23, 2020. A Foreign Exchange Auction is a system when the central bank regularly sells
a given amount of foreign exchange through a bidding process and buys foreign exchange in the
intervening periods at the previous auction-determined rate. It is important to place the exchange
auction in the context of the alternative exchange rate regimes that can be adopted to resolve an
exchange crisis and to restore a cushion of international reserves. The objective of the Auction
System is to establish a “free market” price, boost confidence, increase foreign currency inflows
through formal channels, stabilise inflation and eliminate the parallel market

The Reserve Bank of Zimbabwe (RBZ) replaced the interbank market with weekly foreign
exchange auctions which was operational from 23 June 2020 to determine the Zimbabwe dollar
(ZWL) exchange rate with those in industry and commerce cautiously optimistic that the
platform will enhance transparency and efficient distribution of foreign exchange.

The Tuesday auctions are to sell the foreign currency retained by exporters which must either be
used or sold within 30 days at the discretion of the exporter or be subject to compulsory sale after
30 days. Bidders who wish to buy foreign currency are expected to approach their banks at the
auction rate for the week. This is important to avoid disintermediating banks from the key role
they play in the trading of foreign currency. It also ensures that the price is determined by
material players who have the muscle to move the market in one direction or the other [1]

Results of the auction conducted by the RBZ showed that the highest rate to the greenback on
offer was 100 Zimbabwe dollars while the lowest was 25.5 Zimbabwe dollars. Those who want
to buy hard currency through the auction system would be expected to present one bid per
auction ranging from 50,000 U.S. dollars to 500,000 U.S. dollars.[2]

Like any new intervention the Auction System does have its advantages and disadvantages. The
advantages that stood out when the Auction System was introduced indicated that it had been a
success. Most bidders were allocated funds and the weighted average exchange rate depreciated
to towards a level more reflective of market while the parallel market rate appeared to have
stagnated however this result was just temporary. The reality however is that different companies
probably paid a different rate which can be far higher or far lower than this average rate. From
the data provided bids ranged from $25.50 to $100.00. That is a massive gulf that is smoothed
over by the average of $57.36. It means it is possible one company paid an official rate that is
$44 ZWL higher than the average. It is also possible another company paid as much as $36
below the average rate. . The official exchange rate, however, remained below the parallel
market rate which was running between 80 and 95 per U.S. dollar depending on the method of
payment. The use of a weighted average (mean) to determine the exchange rate is not the best
measure to use with data sets containing in this case more dispersed (volatile) data. They hide
extremes, in this case, $25.50 versus $100.00 are all hidden in a neat figure of $57.36. In this
case, it’s doubtful anyone paid $57.36 for their forex. It would be surprising if anyone paid this
exact rate.The rate is useful as an indicator of foreign currency demand in the country and so on
but do not expect companies to use it. It is not their cost of doing business and therefore it would
be ridiculous to use it as such. Businesses, by convention only consider the real costs they have
incurred otherwise their records become a work of fiction.[4]

The Auction System allows the Monetary Authorities to direct foreign currency to strategic
sectors of the economy through the much-publicised priority list. Finally, and more importantly,
industry players are expected to price their goods and services at the auction rate, which should
have a positive impact on inflation. There are some concerns around the transparency of the
reasons for some bids being rejected. The criteria for determining what qualifies for the auction
needs to be fully disseminated with the banks playing a key part in this process. Bidders are
encouraged to contact their banks for further clarity on the fate of their bids. The good news is
that the authorities have created an auction adjudication committee comprising officials from the
Ministry of Finance and Economic Development and the RBZ.

The central bank has started inviting banks to attend the auctions every Tuesday and witness the
allotment end-to-end. This has addressed most concerns around transparency. A second concern
is that the current weighted average exchange rate derived from the auction is purely a product of
the bids. This rate is therefore, not a totally accurate reflection of the forces of demand and
supply. It is good to note that, in a Monetary Policy Committee meeting held in 2020, foreign
exchange earners were encouraged to participate in the Auction System through their banks at
their preferred rate.

Objectives

 was designed to give fair value of the local currency in relation to the U.S. dollar. At the
auction system, the Zimbabwe dollar debuted at 57 against 1 U.S. dollar at as on the 23 rd
of June 2020

Evaluate the cost benefit analysis of the involvement of the Central Bank of
Zimbabwe in quasi-fiscal activities

In some developing countries, central banks have undertaken a range of quasi-fiscal activities (QFAs)
extraneous to typical central bank functions that have had a significant impact on their financial position
and the economy. Mackenzie and Stella (1996) define a QFA as “an operation or measure carried out by
a central bank or other public financial institution with an effect that can, in principle, be duplicated by
budgetary measures in the form of an explicit tax, subsidy, or direct expenditure and that has or may
have an impact on the financial operations of the central bank, other public financial institutions, or
government.”
Golden Sibanda, [1], The Herald, Published: 23 June, 2020, Accessed: 24 June, 2020

↑ [2], Xinhua Net, Published: 24 June, 2020, Accessed: 24 June, 2020

↑ [3], Reserve Bank of Zimbabwe, Published: 17 June, 2020, Accessed: 11 August, 2020

↑ [4], Zimpricecheck, Accessed: 11 August, 2020

↑ Reserve Bank of Zimbabwe, [5], RBZ, Published: 13 October, 2020, Accessed: 13 Otober,
2020

↑ RBZ, [6], Reserve Bank of Zimbabwe, Published: 18 August, 2020, Accessed: 18 August,
2020

↑ Raynold Mhotseka, [7], Equity Axis, Published: 14 August, 2020, Accessed: 14 August, 2020

↑ [8 Treasurer’s Forum of the

Bankers Association of Zimbabwe], Business Weekly, Published: 29 January, 2021, Accessed:

29 January, 2021