An Evaluation of the Effectiveness of the Foreign Exchange Auction Market in Zimbabwe

Abstract

The dissertation evaluated the effectiveness of the Reserve Bank of Zimbabwe foreign exchange auction market. It also analysed the macroeconomic conditions prevailing in Zimbabwe in relation to foreign exchange auction market. The objective was to evaluate the ways that are being used by the Reserve Bank of Zimbabwe to manage the foreign exchange auction market. The research also aimed to identify and assess the exchange rate management systems that are being applied by the Reserve Bank of Zimbabwe to manage the foreign exchange market. The aim was to explore various ways that can be used by the Reserve Bank of Zimbabwe to increase foreign currency auction market efficiency. Literature review analysis showed that the same auction system failed in 2005 under the guidance of Dr Gideon Gono. It also indicated that the auction market of 2004 was mainly affected by lack of foreign currency supply, poor macroeconomic conditions and manipulation of rates by the authorities. The portfolio-based channel and the monetary model covered the theoretical framework on how foreign exchange markets operates and how the authorities can intervene to create foreign exchange stability. Findings indicated that the main challenge of the auction market is the lack of foreign currency supply and the manipulation of rates by the authorities. The difference between the official rate and the parallel market rate makes the auction market unfavourable for the sellers of foreign currency. Auction market rules and regulations which are not fair also affect other companies (priority-based allocation) to perform on the foreign exchange market. Results indicate that the major source of foreign currency on the auction is mandatory forex liquidations, borrowings and taxation receipts. Mandatory foreign currency liquidations neutralise overall company performances by reducing other company reserves whilst supporting low forex earning companies. The findings indicate that there are so many challenges that needs to be resolved by the Reserve Bank of Zimbabwe to promote formal trading in the foreign exchange market (willing buyer and willing seller). The foreign exchange auction platform is a key market in the economy that requires stability to promote efficient allocation of foreign currencies. Foreign exchange market supports the movement of goods into the country (imports) and out of the country (exports)., the foreign exchange auction market is not efficient as indicated by its failure to pay out allocated bids in time, participants limited to priority list, allocation of foreign currency that is not available instantly, continuous increase of exchange rates and lack of proper clear rules known to participants. Therefore, in a country like Zimbabwe were there are various currencies in circulation, it is crucial to ensure stability in the foreign exchange auction market to have overall economic stability.