Foreign Currency

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.

Background

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. RBZ governor Dr John Mangudya said the auction system will operate on the Reuters Forex Trading platform, a real-time electronic trading system. The weekly auctions are designed to improve transparency and efficiency in trading of forex in Zimbabwe.[1]

Zimbabwe conducted its first foreign currency auction in years to boost transparency and efficiency in the forex market on 23 June 2020. The Reserve Bank of Zimbabwe (RBZ) had announced that it will discard the 1:25 fixed interbank exchange rate system, which had been in place since February 2020.

The central bank said that the auction system, to be held every Tuesday, 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. The new official exchange rate, however, remains below the parallel market rate which is running at between 80 and 95 per U.S. dollar depending on the method of payment.

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]

Forex Auction - First Day Results

Funding of the Foreign Exchange Auction System

The foreign Exchange Auction System is funded from:

  • Offshore facilities arranged by the Reserve Bank of Zimbabwe
  • Foreign currency availed through surrender requirements, which are liquidated at the prevailing market rate, and export proceeds liquidations upon expiry of the 30-day retention period; and
  • Foreign currency exchanged by exporters and free funds holders through the banking system at the prevailing market rate.[3]

How the System Works

An exchange auction is any regime where the allocation of a given amount of foreign exchange is determined through a bidding process.

Typically, a country moves initially from a fixed rate regime with administrative controls to a transitional multiple rate system, with one lower fixed-rate market and one floating rate market. The unified auction regime can be modified as well to confer special treatment on certain categories of transactions, such as petroleum imports and public sector expenditures.

Exchange Rate Determination

Pricing

There are two basic systems for determining the exchange rate in a foreign exchange auction using sealed bids.

  • Under marginal pricing, the clearing rate, or the highest rate at which the bids fully exhaust the offered foreign exchange, is paid by all successful bidders who receive foreign exchange.
  • Under the Dutch auction, each successful bidder is charged what he or she bid. Under both systems, all purchases of foreign exchange up until the next auction are made at the marginal rate.

How the Dutch Auction System Work

During the auction each and every one of these companies taking part in the auction, potential buyers, enter their bids for the amount of foreign currency they want to purchase as well as the rate they are willing to pay. During the first auction on 23 June 2020 the rates started at $25.50 ZWL and went up to $100.00 ZWL. So, for example, Delta Corporation might send in a bid that says they want $100 000 and are willing to pay a rate of $100.00 for it.

Once all the bids are submitted, the allotted amount($10 million in this case) is then assigned to the bidders from the highest bids down, until all of the whole allotted batch of foreign currency is assigned. The Dutch Auction starts from the highest bid downwards. The final rate that each buyer pays really depends on the exact nature of the auction but in this case, it seems those who bid the highest amount got the foreign currency they asked for, then the next highest batch and so on.

So for example the auction starts at $100.00:

  • Several companies feel this is acceptable and gobble up $2 000 000 US in foreign currency
  • The system then reduces the rate to $80 and several companies gobble that up at the trough until they have had their fill and there is $5 000 000 left
  • The rate is reduced to $60 ZWL and so on and each time the rate is reduced more and more of the foreign currency is taken up
  • Until maybe there is $1000 left which is finally gobbled up at $25.50 ZWL

This is all hypothetical in terms of the amount but that is the gist of a Dutch Auction.

The stupidity of averages

From here a weighted average (mean) is then calculated and the RBZ got a rate of $57.36 ZWL as to 1 USD on 23 June 2020. 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’s 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.

Anyone who has taken a basic statistics course will tell you why averages, especially means are stupid:

  • They hide extremes, in this case, $25.50 versus $100.00 are all hidden in a neat figure of $57.36
  • Often what you are not getting is not typical data with means you get things like 3.5 people. In this case, it’s doubtful anyone paid $57.36 for their forex. It would be surprising if anyone paid this exact rate.

That makes the rate useful but meaningless

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]

Auction Bids, Allotment and Average Rate

27 October 2020

The Zimbabwean dollar had a slight slump at ZWL$81.3531 against the US dollar from last week's ZWL$81.3499 following today’s separate foreign currency auction trading for both Small and Medium Enterprises (SMEs) and the main auction in their thirteenth and nineteenth staging respectively. Foreign exchange results released by the Reserve Bank of Zimbabwe (RBZ) showed that a total amount of US$1 676 072.85 down from US$1 740 633.79 the previous week was allocated on the SMEs forex auction with the highest rate unchanged at US$1:ZWL$86.00 as in previous week and the lowest rate went up slight to US$1:ZWL$79.90 form ZWL$79.00 last week, while a total of US$26 175 746.77 down from US$27 057 595.85 the previous week was allocated on the main exchange market at the highest rate of ZWL$89.00 up from $87.10 last week and a lower rate of ZWL$80.00 up from ZWL$79.00 last week.

  • The number of bids for SMEs was unchanged and for the Main exchange were up compared to the previous week. Last week there were 146 and 238 bids respectively with those disqualified standing at 14 and 15 respectively, and this week the bids stood at 146 and 274 respectively with those disqualified standing at 18 and 36 respectively.

20 October 2020

The Zimbabwean dollar had a slight slump at ZWL$81.3499 against the US dollar from last week's ZWL$81.3458 following today’s separate foreign currency auction trading for both Small and Medium Enterprises (SMEs) and the main auction in their twelfth and eighteenth staging respectively. Foreign exchange results released by the Reserve Bank of Zimbabwe (RBZ) showed that a total amount of US$1 740 633.79 down from US$1 828 623.41 the previous week was allocated on the SMEs forex auction with the highest rate unchanged at US$1:ZWL$86.00 as in previous week and the lowest rate unchanged at US$1:ZWL$79.00 as last week, while a total of US$27 057 595.85 down from US$27 396 490.94 the previous week was allocated on the main exchange market at the highest rate of ZWL$87.10 down from $88.07 last week and an unchanged lower rate of ZWL$79.00 as last week.

  • The number of bids for SMEs went down and for the Main exchange were down as well compared to the previous week. Last week there were 163 and 255 bids respectively with those disqualified standing at 10 and 26 respectively, and this week the bids stood at 146 and 238 respectively with those disqualified standing at 14 and 15 respectively.

13 October 2020

The Zimbabwean dollar was unchanged at ZWL$81.35 against the US dollar from last week's ZWL$81.35 following today’s separate foreign currency auction trading for both Small and Medium Enterprises (SMEs) and the main auction in their eleventh and seventeenth staging respectively. Foreign exchange results released by the Reserve Bank of Zimbabwe (RBZ) showed that a total amount of US$1 828 623.41 up from US$1 436 197.21 the previous week was allocated on the SMEs forex auction with the highest rate unchanged at US$1:ZWL$86.00 as in previous week and the lowest rate unchanged at US$1:ZWL$79.00 as last week, while a total of US$27 396 490.94 up from US$24 691 329.32 the previous week was allocated on the main exchange market at the highest rate of ZWL$88.07 up from $87.00 last week and an unchanged lower rate of ZWL$79.00 as last week.

  • The number of bids for SMEs went up and for the Main exchange were up compared to the previous week. Last week there were 135 and 228 bids respectively with those disqualified standing at 21 and 35 respectively, and this week the bids stood at 163 and 255 respectively with those disqualified standing at 10 and 26 respectively.[5]

6 October 2020

The Zimbabwean dollar gains slightly at ZWL$81.35 against the US dollar from last week's ZWL$81.44 following today’s separate foreign currency auction trading for both Small and Medium Enterprises (SMEs) and the main auction in their tenth and sixteenth staging respectively. Foreign exchange results released by the Reserve Bank of Zimbabwe (RBZ) showed that a total amount of US$1 436 197.21 down from US$1 441 116.28 the previous week was allocated on the SMEs forex auction with the highest rate at US$1:ZWL$86.00 same as in previous week and the lowest rate standing at US$1:ZWL$79.00 up from $78.00 last week, while a total of US$24 691 329.32 up from US$23 067 310.73 the previous week was allocated on the main exchange market at the highest rate of ZWL$87.00 up from $86.00 last week and a lower rate of ZWL$79.00 up from $76.00 last week.

  • The number of bids for SMEs went up and for the Main exchange were down compared to the previous week. Last week there were 129 and 233 bids respectively with those disqualified standing at 6 and 22 respectively, and this week the bids stood at 135 and 228 respectively with those disqualified standing at 21 and 35 respectively.

29 September 2020

The Zimbabwean dollar gains slightly at ZWL$81.44 against the US dollar from last week's ZWL$81.50 following today’s separate foreign currency auction trading for both Small and Medium Enterprises (SMEs) and the main auction in their ninth and fifteenth staging respectively. Foreign exchange results released by the Reserve Bank of Zimbabwe (RBZ) showed that a total amount of US$1 441 116.28 up from US$1 224 857.29 the previous week was allocated on the SMEs forex auction with the highest rate at US$1:ZWL$86.00 same as in previous week and the lowest rate standing at US$1:ZWL$78.00 same as last week, while a total of US$23 067 310.73 down from US$30 414 189.63 the previous week was allocated on the main exchange market at the highest rate of ZWL$86.00 down from $86.70 last week and a lower rate of ZWL$78.00 same as last week.

  • The number of bids for SMEs went up and for the Main exchange were down compared to the previous week. Last week there were 117 and 301 bids respectively with those disqualified standing at 22 and 35 respectively, and this week the bids stood at 129 and 233 respectively with those disqualified standing at 6 and 22 respectively.

22 September 2020

The Zimbabwean dollar gains slightly at ZWL$81.50 against the US dollar from last week's ZWL$81.71 following today’s separate foreign currency auction trading for both Small and Medium Enterprises (SMEs) and the main auction in their eighth and fourteenth staging respectively. Foreign exchange results released by the Reserve Bank of Zimbabwe (RBZ) showed that a total amount of US$1 224 857.29 up from US$1 145 006.39 the previous week was allocated on the SMEs forex auction with the highest rate at US$1:ZWL$86.00 slightly lower than in previous week and the lowest rate standing at US$1:ZWL$78.00 up from $75 last week, while a total of US$30 414 189.63 up from US$20 023 899.32 the previous week was allocated on the main exchange market at the highest rate of ZWL$86.70 down from $88 last week and a lower rate of ZWL$78.00 up from $75 last week.

  • The number of bids for SMEs went up and for the Main exchange were down compared to the previous week. Last week there were 96 and 174 bids respectively with those disqualified standing at 12 and 10 respectively, and this week the bids stood at 117 and 301 respectively with those disqualified standing at 22 and 35 respectively.

15 September 2020

The Zimbabwean dollar gains slightly at ZWL$81.71 against the US dollar from last week's ZWL$82.70 following today’s separate foreign currency auction trading for both Small and Medium Enterprises (SMEs) and the main auction in their seventh and thirteenth staging respectively. Foreign exchange results released by the Reserve Bank of Zimbabwe (RBZ) showed that a total amount of US$1 145 006.39 up from US$876 674.44 the previous week was allocated on the SMEs forex auction with the highest rate at US$1:ZWL$86.50 slightly higher than in previous week and the lowest rate standing at US$1:ZWL$75.00, while a total of US$20 023 899.32 up from US$18 334 530.08 the previous week was allocated on the main exchange market at the highest rate of ZWL$88.00 and a lower rate of ZWL$75.00.

  • The number of bids for SMEs went up and for the Main exchange were down compared to the previous week. Last week there were 74 and 216 bids respectively with those disqualified standing at 15 and 31 respectively, and this week the bids stood at 96 and 174 respectively with those disqualified standing at 12 and 10 respectively.

8 September 2020

The Zimbabwean dollar gains slightly at ZWL$82.70 against the US dollar from last week's ZWL$83.32 following today’s separate foreign currency auction trading for both Small and Medium Enterprises (SMEs) and the main auction in their sixth and twelfth staging respectively. Foreign exchange results released by the Reserve Bank of Zimbabwe (RBZ) showed that a total amount of US$876 674.44 down from US$976 403.52 the previous week was allocated on the SMEs forex auction with the highest rate remaining at US$1:ZWL$86.00 as in previous week and the lowest rate standing at US$1:ZWL$73.00, while a total of US$18 334 530.08 up from US$15 039 656.10 the previous week was allocated on the main exchange market at the highest rate of ZWL$88 and a lower rate of ZWL$75.00.

  • The number of bids for SMEs went down and for the Main exchange were up compared to the previous week. Last week there were 75 and 154 bids respectively with those disqualified standing at 11 and 25 respectively, and this week the bids stood at 74 and 216 respectively with those disqualified standing at 15 and 31 respectively.

1 September 2020

The Zimbabwean dollar gains slightly at ZWL$83.32 against the US dollar following today’s separate foreign currency auction trading for both Small and Medium Enterprises (SMEs) and the main auction in their fifth and eleventh staging respectively. Foreign exchange results released by the Reserve Bank of Zimbabwe (RBZ) showed that a total amount of US$976 403.52 up from US$960 791.84 the previous week was allocated on the SMEs forex auction with the highest rate reaching US$1:ZWL$86 and the lowest rate standing at US$1:ZWL$76.50, while a total of US$ 15 039 656.10 up from US$14 064 871.90 the previous week was allocated on the main exchange market at the highest rate of ZWL$87.50 and a lower rate of ZWL$76.00.

  • The number of bids for SMEs went down and for the Main exchange were up compared to the previous week. Last week there were 85 and 139 bids respectively with those disqualified standing at 10 and 33 respectively, and this week the bids stood at 75 and 154 respectively with those disqualified standing at 11 and 25 respectively.

25 August 2020

The Zimbabwean dollar eased to ZWL$83.40 against the US dollar following today’s separate foreign currency auction trading for both Small and Medium Enterprises (SMEs) and the main auction in their fourth and tenth staging respectively. Foreign exchange results released by the Reserve Bank of Zimbabwe (RBZ) showed that a total amount of US$960 791.84 up from US$517 630.88 the previous week was allocated on the SMEs forex auction with the highest rate reaching US$1:ZWL$88 and the lowest rate standing at US$1:ZWL$75, while a total of US$ 14 064 871.90 up from US$13 679 558.32 the previous week was allocated on the main exchange market at the highest rate of ZWL$88 and a lower rate of ZWL$80.00.

18 August 2020

The Zimbabwean dollar eased to ZWL$82.92 against the US dollar following today’s separate foreign currency auction trading for both Small and Medium Enterprises (SMEs) and the main auction in their third and ninth staging respectively. Foreign exchange results released by the Reserve Bank of Zimbabwe (RBZ) showed that a total amount of US$517 630.88 down from US$789 866 the previous week was allocated on the SMEs forex auction with the highest rate reaching US$1:ZWL$85 and the lowest rate standing at US$1:ZWL$78, while a total of US$ 13 679 558.32 down from US$18 million the previous week was allocated on the main exchange market at the highest rate of ZWL$88.38 and a lower rate of ZWL$80.00.[6]

13 August 2020

The Zimbabwean dollar eased to 82.56 against the US dollar following Thursday’s separate foreign currency auction trading for both Small and Medium Enterprises (SMEs) and the main auction in their second and eighth staging respectively. Foreign exchange results released by the Reserve Bank of Zimbabwe (RBZ) on Thursday showed that a total amount of US$789 866 was allocated on the SMEs forex auction with the highest rate reaching US$1:ZWL$90 and the lowest rate standing at 1:80, while a total of US$18 million was allocated on the main exchange market at the highest rate of 90 and a lower rate of 77.[7]

References

  1. Golden Sibanda, [1], The Herald, Published: 23 June, 2020, Accessed: 24 June, 2020
  2. [2], Xinhua Net, Published: 24 June, 2020, Accessed: 24 June, 2020
  3. [3], Reserve Bank of Zimbabwe, Published: 17 June, 2020, Accessed: 11 August, 2020
  4. [4], Zimpricecheck, Accessed: 11 August, 2020
  5. Reserve Bank of Zimbabwe, [5], RBZ, Published: 13 October, 2020, Accessed: 13 Otober, 2020
  6. RBZ, [6], Reserve Bank of Zimbabwe, Published: 18 August, 2020, Accessed: 18 August, 2020
  7. Raynold Mhotseka, [7], Equity Axis, Published: 14 August, 2020, Accessed: 14 August, 2020