Enhancing Foreign Currency Allocation for Private Sector Development – Case of the Reserve Bank of Zimbabwe Forex Auction System

Abstract

Foreign currency shortages remain a perennial challenge in Zimbabwe leading to several spillover effects such as shortages in electricity, raw materials, fuel, inflation among other market distortions. The central bank introduced the Dutch Auction system in an attempt to address forex shortages but the effectiveness of this approach has been questioned. This study employed the Vector Autoregressive (VAR) and error corrected (VECM) models in order to empirically determine how the Reserve Bank of Zimbabwe can efficiently allocate foreign currency in a manner which supports private sector development. In the short run, the auction is an effective tool to promote private sector development. However, long run analysis presents a deletions effect. This is due to a rise in round-tripping from market participants to leverage and perform arbitrage on different rates (auction and parallel), increased backlog reflecting shortages in allotments and high incidences of corruption. All this leads to a significant decrease in the confidence levels of the economy among private stakeholders. The study recommends monitoring of authorized auction dealers, improve public confidence by minimizing rent-seeking behavior, re-model exporters participation in the auction system or abandoning the auction system altogether.