Biti says RBZ forex auction system a charade, headed for collapse

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By Robert Tapfumaneyi

FORMER Finance Minister and legislator Tendai Biti has dismissed the Reserve Bank of Zimbabwe (RBZ) foreign currency auction system as a charade that is set implode once all economic fundamentals begin to kick in.

Biti made the comments while presenting his State of the Economy Address at SAPES Trust in Harare Tuesday.

SAPES Trust hosts high-profile discussions focussing on topical issues often to do with the economy and politics.

Following a volatile parallel market foreign exchange rate, government moved to introduce the auction system manned by the central bank.

Authorities have credited the system for bringing some semblance of stability into the exchange rate.

But Biti, once a astute Treasury chief during his tenure, poked holes in the system.

He said the RBZ system was hollow in that there was still a thriving parallel market that was offering rates higher than those generated weekly by the official system.

“This myth will break, there will be an implosion as more and more demand on foreign currency increases.

“When the demand on foreign currency increases with a limited supply, the price will shoot up.

“So, the pretence of 80, 81, 79 is a myth and myth that will be shattered very soon.

“There has been a claim by this regime that the Dutch auction system has worked and has stabilised the prices. We contend that the Dutch auction system is not an auction system.

“An auction system is a free market, with free entry on both on supply side and on demand side.

“Regrettably, as far as the Dutch auction system is concerned, there is only one supply…only the Reserve Bank has been supplying foreign currency.

“So, where you have got one supplier, you can’t call that an auction. It’s a fixed exchange rate regime because he who controls the supply line, he who controls the tap, can control the value of the product.”

Biti added, “And you will notice that the price of the product of the foreign currency on the Dutch auction system has remained constantly at 80, it has been floating between 79 to 82 and it has averaged 80.

“It’s a controlled exchange rate, it’s a rigged exchange rate, the (RBZ) governor wakes up on the wrong side of the bed on Tuesday and says today it is going to be 81 or today it is going to be 79. There is no science, there is no attempt to be sophisticated.

“So, the issue of exchange rate stability is a myth.”

Biti said an average of US$18 million has been released to the auction floor every Tuesday, which meant that end of year, US$468 million would have been released in total.

He continued, “Assuming the same will happen in 2021, in a 12-month circle, the auction would have sold around US$936 million.

“Over the years, the regime’s failure to contain money supply has created huge distortions in the economy.

“In the second half of 2019, reserve money shot sharply to reach an estimated ZWL$9 billion compared to 3.3 billion in June of the same year.

“For the period June 2019-June 2020, money supply grew by 575.9 percent from ZWL $14.7 billion to ZWL $98.82 billion.

“The increase in money supply is underpinned largely by unregulated quasi-fiscal activities by a rogue and captured central bank that has effectively been running a parallel treasury.

“It is also a reflection of corruption and massive leakages in the system.

“For instance, in July 2019, the RBZ discounted a US  300-million-dollar denominated Treasury bill held by Kuda Tagwirei’s Sakunda Holdings at below market rates thereby fuelling parallel market activity and a sharp decline in the official exchange rate.

“The introduction in September for an export incentive for gold purchases increased the reserve money by ZWL 400 million per month.

“With Pfumbudza, Command Agriculture and internal fissures, we expect reserve money to increase further thereby pushing inflation pressures.”

In June of 2020, the Reserve Bank Governor introduced the Dutch Foreign Exchange Auction System.

The rate launched at ZWL$$57: USD1.

It has since settled at around ZWL$$82: USD1.