(Reuters) – Zimbabwe conducted its first weekly foreign currency auction on Tuesday with the local dollar trading at an average of 57.3582 to the U.S. dollar, ending a fixed exchange rate of 25 in place since March.
The southern African country reintroduced its local currency last year after a decade of official use of the U.S. dollar in the economy. But the local currency rapidly lost value, sending prices rocketing and raising fears of renewed hyperinflation.
Since the end of dollarisation, the government has flirted with a managed float exchange rate, which it announced on March 11, before fixing the exchange rate at 25 Zimbabwe dollars to the U.S. dollar on March 26, citing the need to support the economy against the COVID-19 pandemic.
The new foreign currency auctions were announced last week after exporters complained that the fixed exchange rate was hurting them. Their costs were based on a black market rate that was significantly weaker than the official rate.
During Tuesday’s inaugural weekly auction, bids amounted to US$11.4 million, while US$10.3 million was made available. The lowest bid was 25 Zimbabwe dollars for one U.S. dollar and the highest reached 100 Zimbabwe dollars for one greenback.
Sources of foreign currency for the auction market include part of the export proceeds retained by the central bank, export earnings, remittances and credit from unnamed international banks.
The bulk of the funds sought by bidders through the auction system was to support imports of raw materials, machinery and equipment as well as food and beverages, according to a central bank notice.
Currency in free fall, Zimbabwe tries forex auction system dating back 16 years
Zimbabwe has tried to stabilise its currency for the past three years.
It has previously tried a currency peg and a managed float.
The forex auction system was last used in 2004 and abandoned after just a year.
After struggling to stabilise its currency for the past three years, Zimbabwe on Tuesday turned to a foreign exchange trading system it last used in 2004.
The southern African country was set to introduce a Foreign Exchange Auction System to determine the Zimbabwe dollar exchange rate after the previous systems – namely a currency peg and a managed float – failed to stabilise the Zimbabwe dollar.
The Zimbabwe dollar, which was for the past two months pegged at 25 to the United States dollar, had lost significant value on the parallel market, which is widely used to trade foreign currency.
Prior to adoption of the pegged exchange rate system, the market had used the interbank market system since February 2019, but this too failed to stabilise the exchange rate.
Many informal foreign currency traders are exchanging the Zimbabwe dollar at an rate of between 80 and 100 to the greenback.
Reserve Bank of Zimbabwe Governor Dr John Mangudya said last week the auction system would operate on the Reuters Forex Trading platform, a real-time electronic trading system.
Mangudya said the auction would improve transparency and efficiency in the trading of forex in Zimbabwe.
The auction system is not new to Zimbabwe, as currency instability back in 2004 saw the country introduce the same system.
It was abandoned within a year following complaints of manipulation of the rate by the central bank, and an inability by foreign currency holders to withdraw their offers from the auction if they were unhappy with bids.
Economist and Reserve Bank of Zimbabwe Monetary Policy Committee member Eddie Cross said what the market needed for the auction system to be successful was “confidence in the process and transparency”.
Cross said with the central bank lacking reserves, the system would depend on supply and demand.
“If conducted properly and with little interference by authorities, the auction system will achieve the desired objectives,” added Zimbabwe National Chamber of Commerce chief executive Takunda Mugaga.–fin24