Good start for currency auctions

The Reserve Bank of Zimbabwe’s currency auction got off to a good start with the Zimbabwe dollar going for an average Z$4 200 to the greenback and the central bank only selling one-tenth of the US$5 million it had on offer.

Reports said demand for the hard currency was low because most companies were still closed because of the Christmas break, the return of forex-carrying Zimbabweans abroad for the holidays, and the need for besieged commercial banks to raise Zimdollar reserves.

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Viewing cable 04HARARE81, Good Start for Currency Auctions

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141328Z Jan 04

UNCLAS HARARE 000081

SIPDIS

STATE FOR AF/S AND AF/EX

NSC FOR SENIOR AFRICA DIRECTOR JFRAZER

USDOC FOR AMANDA HILLIGAS

TREASURY FOR OREN WYCHE-SHAW

PASS USTR FLORIZELLE LISER

STATE PASS USAID FOR MARJORIE COPSON

¶E. O. 12958: N/A

TAGS: ECON EINV ETRD PGOV ZI

SUBJECT: Good Start for Currency Auctions

¶1. Summary: The Reserve Bank of Zimbabwe (RBZ)’s initial

currency auction ran smoothly. The RBZ now wants to find

an exchange rate that discourages speculation but

encourages exports. End Summary.

Zimdollar has gained 35 percent

——————————-

¶2. The RBZ held its first auction on Jan 12, where the

zimdollar traded at a weighted average of 4200:US$. This

rate seems to mirror the present parallel rate,

reflecting a 35-percent stronger zimdollar than last

month. During a similar period last year (December 15,

2002-January 30, 2003), the zimdollar gained a more

modest 12 percent against the US dollar.

¶3. Demand for US dollars has been light for a variety of

reasons – Christmas/Summer break, return of forex-

carrying Zimbabweans abroad for the holidays, need for

besieged commercial banks to raise Zimdollar reserves.

In fact, the RBZ sold only one-tenth of the US$ 5 million

it brought to auction on Monday. As companies resume

operations, they will need forex for imports, increasing

demand.

What to Expect

————–

¶4. It’s obviously impossible to predict the zimdollar’s

future rate. However, we make the following

observations:

– Demand for US dollars will pick up, but only gradually.

Importers who bought US dollars at higher rates are stuck

with large inventories.

– The RBZ has great leverage to control the auction

exchange rate. It is the RBZ, not exporters, which

determines when and at what rate forex earnings are

exchanged. The RBZ is free to accept or refuse as many

low-ball offers for US dollars as it wants – it’s the

exporters, not Government, that takes home fewer

zimdollars – which in turn drives down the weighted

average.

– Because the RBZ presently has more forex than it can

sell, bankers have told us they will make a number of low-

ball offers at the upcoming auctions. If the RBZ accepts

these offers, the weighted average will be lower

(meaning, exporters will earn less). Thus we could see

the rate fall further in the very near-term.

Comment

——-

¶5. Despite its early success, the RBZ is playing a

difficult game. To displace the parallel market, it has

to maintain a high enough auction rate that exporters

still have an incentive to export. They already

sacrifice 25 percent of earnings at the official rate

(Z$824:US$). This year’s tobacco harvest will be the

lowest in a decade and the RBZ cannot afford to

discourage exports in mining, manufacturing and other

agribusinesses. With inflation continuing to surge,

Zimbabwe would price itself out of international markets;

the RBZ would have so little forex to auction that buyers

would eventually turn to the parallel market. The

Confederation of Zimbabwe Industries says RBZ Governor

Gideon Gono has reacted favorably to a proposal that

exporters no longer surrender 25 percent of earnings at

the official rate but submit 50 percent for auction.

Still, the mandatory official exchange has been easy

money for the GOZ, a tough habit to break.

Sullivan

(26 VIEWS)