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Industry Wants Fine-tuning Of Forex Auction System

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Industry Wants Fine-tuning Of Forex Auction System

Captains of the industry say authorities should overhaul the foreign currency auction system to eradicate arbitrage opportunities that some firms and individuals are using to accumulate cheap US dollars.

This comes after Finance and Economic Development Minister Mthuli Ncube said the foreign currency auction platform will be fine-tuned to close the gap between the official exchange rate and the parallel market exchange rate.

Confederation of Zimbabwe Industries (CZI) president Kurai Matsheza told Business Times that the forex auction system should be overhauled to represent the true Dutch system, which promotes competition among bidders. Said Matsheza:

There is a need to do a total fine-tuning of the forex auction system to represent the true characteristics of a Dutch auction system.

As we can see, the authorities have done some piecemeal adjustments to the platform but it is still a long way to go to become the real auction platform.

By doing these small changes, we still have a lot of arbitrage opportunities that some firms and individuals are capitalising on to make money.

An improved auction system is a better platform than an interbank where some people just sit down to decide the exchange rate.

This may be the reason why the official rate is 50% lower than the official rate.

Zimbabwe now has three forex markets namely the auction, interbank and parallel market.

Economist Gift Mugano recently said the forex markets can only converge if authorities follow the real Dutch auction system. Said Mugano:

They will only converge if they follow the real Dutch auction system where you take the highest bidder price as the benchmark for the auction rather than taking the average price as done by the RBZ.

They must notify people in advance because one can’t bid in the darkness and only if they follow the rules of the real Dutch auction system will they someday converge.

You will see all the exchange rates moving in different directions. The parallel market rate will be ahead followed by other exchange rates.

The major reason the interbank can’t converge also is that there are some controls that are still there.

There are some limits to how much one can trade whereas there is no limit on the parallel market rate

The Zimbabwe dollar was this week trading at ZWL$1888.80:US$1 at the auction system and above ZWL$3000: US$1 on the black market.

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