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Prosper Ndlovu, Business Editor
THE country’s largest industrial body, Confederation of Zimbabwe Industries (CZI), is confident the introduction of the forex auction system could yield the desired currency stability and curb depreciation of the Zimbabwean dollar.

The auction system began this week Tuesday, replacing the fixed exchange regime, and has set the rate at 57.3 to the US-dollar from the fixed 1:25 exchange rate, which was blamed for fuelling speculative parallel market rates. Illegal forex traders had in the past weeks pegged the US-dollar at above 90 against the local dollar.

Since the return of Zim-dollar last year, exchange rate volatility had resulted in price escalation leading to weakening aggregate demand as consumer spending got eroded by inflation.

With that background, monetary authorities have adopted the auction model to foster transparency and efficiency in the allocation of foreign currency resources. Under the model, a weighted average rate will be calculated based on allotments, and the average rate will be used as the market exchange rate until a new weighted average rate is determined at a subsequent auction.

In its response paper on the evaluation of the recently announced fiscal and monetary policies, CZI said it believes the new auction system would eliminate previous distortions on the currency front.

“The major advantage of an auction market over a dealer market is that an auction market is far more difficult to manipulate than a dealer market.

“In a dealer market the dealer can set the price without having transacted a single dollar. In an auction market actual transactions set the price,” said CZI.

“The introduction of the auction system to replace the fixed exchange rate regime offers an opportunity for the stabilisation of the Zimbabwe dollar and the elimination of the major macro-economic distortion in the economy – namely the exchange rate.”

The industry body noted that while the auction system was once tried in 2004-2005 and failed, certain factors were behind its failure at that time, which should not be allowed to impede progress this time around.

“We know why it failed, but will we learn from history and avoid the same mistakes.

“As we all know the key success factors are to: allow the auction to be a true auction and maintain iron clad fiscal and monetary discipline,” reads the position paper issued yesterday.

CZI said the auction system and payment of a US-dollar allowance to civil servants have been announced at a time when the country was experiencing a protracted crisis characterised by stagflation with inflation at 785.6 percent and Gross Domestic Product projected to decline by 15-20 percent.

It noted that the absence of a formal foreign exchange market had worsened access to foreign currency for business, in addition to fueling the foreign exchange parallel market.

High unemployment, low production and productivity levels, and the currency crisis had almost eliminated any recovery prospects of the economy, said the industry body.

In addition to an “inconsistent policy environment”, CZI said the doing business environment has been worsened by Covid-19, which has led to a collapse of demand, supply chain disruptions in source and destination markets, unemployment, debt accumulation, working capital difficulties, and loss of livelihoods for many.

In order for the auction to work and to influence the price of foreign exchange across the economy it must be perceived to be credible, said CZI.

“We know that the auction market in 2004 degenerated into an allocation system, not an auction. So, the question is how can we ensure that the auction is perceived by the market as a credible auction?

“Perhaps the most important thing is to ensure that indeed the highest bidder wins and this may be complemented by a small independent team of observers at each auction to validate auction results,” said CZI.

To keep the rate stable the Industry body believes that there should be strict maintenance of money supply control and enhancing market confidence in the long-term prospects of Zimbabwe dollar stability.

“We all know that no currency can remain viable unless it is perceived as a store of value. We also know that the market has currently no confidence in the Zimbabwe dollar,” it said.

In that regard, the industrialists have challenged the Reserve Bank of Zimbabwe to use signaling as a means of influencing the market to move to a positive interest rate environment by the end of 2020 and that all stakeholders should plan accordingly.

“The introduction of the foreign exchange auction trading system is a good initiative. However, effective implementation is key to success. There is need for collective effort so that we do not repeat the mistakes of 2004. Interference with the market mechanism and monetary indiscipline lead to inefficiencies that will cause the total collapse of the auction aystem as well as failure to defend the local currency,” said the industry body.