Continuing with our discussion from the first article, we look at how the payments for current international payments are done using both auctions i.e., the RBZ auction and the Willing Buyer Willing Seller auction.
The RBZ Auction
The RBZ auction was introduced in June 2020 to allow for transparent and efficient allocation of foreign currency in the economy. Financed largely through the domestic and export retention regimes together with other offshore arrangements by the central bank, the auction separates transactions by bid ticket size using two ‘auctions.’ The main auction caters for large businesses (bid min size of US$50,000; max size of US$500,000 for primary producers; max for secondary producers is US$100,000) while the SME auction that was introduced in August 2020 (bid min size of US$2,500; max size US$20,000 for primary producers; max for secondary producers being US$10,000) caters for SMEs. The bid size is both a limitation and an indication of the auction one should participate in.
Participation on the RBZ auction has been characterized with delayed settlement of bids (with the worst delays experienced in July 2021 to June 2022), competition for foreign currency with arbitragers as seen by the number of entities banned from participating on the auction as well as extra compliance burdens through spot audits by the financial intelligence unit of the RBZ.
Despite these external drawbacks, importers (especially of critical imports) who have no real access to free funds rely on the RBZ auction system. Of late, bids were being settled in 11 – 14 days and has proven to be an effective foreign currency market for settling current payments which in essence would be recapitalizing the business using the local currency.
The processing of foreign currency payment via this auction
Irrespective of the type of payment, the key distinction with using free funds is that going through the auction requires fulfillment of strict transaction support, beneficiary ownership disclosures as well as having sufficient local currency to effect the trade. Of importance, businesses with pending acquittals cannot participate in the auction unless they obtain approval for extension unlike when one uses free funds at which point, they pay a penalty per foreign transaction processed while red flagged. Strict transaction support is complied with by filling in the required information on the Application Foreign Currency Bid Form, the Pre Auction Validation Form, and the Company Profiling Template.
a. Application Foreign Currency Bid Form Explainer
b. Pre Auction Validation Form Explainer
c. Company Profiling Template Explainer
Payments require that the SME obtains the necessary documentation for transaction identification and support. Once these are in place, they need to complete the application forms and attach the supporting documentation when placing the bid. Upon successfully being allocated the auction funds, it should be impressed that auction funds must be utilized via processing the payment within 72 hours of receipt failure of which results in RBZ recalling them.
Part payments are possible, and this allows for effective cash management as well as using the auction as a hedging instrument i.e., when there is excess ZWL it can be converted to inventory or asset payments hence preserving value through the auction. Management of the auction bids and payments (especially part payments) becomes critical as acquittal extensions can be disapproved leading to failure to participate in the auction when need arises plus potential of being penalized when using free funds.
Willing Buyer Willing Seller Auction
The RBZ auction suffered huge settlement delays approaching US$200million in the period July 2021 to June 2022. This made the central bank introduce the Willing Buyer Willing Seller (WBWS) auction to ease the pressure on the RBZ auction and allow for a more liberal fx rate determination on the market. The authorized dealers trade currency on behalf of their clients (holders and buyers of foreign currency).
Businesses can purchase foreign currency using the WBWS auction up to a maximum of US$20,000 per week. The weekly limit gives a low bid size compared to RBZ main auction, but one equivalent to the RBZ SME auction almost as if to suggest to market players that the WBWS auction ‘competes’ with its RBZ counterpart. However, the WBWS has largely been a buyer’s market with limited sellers which pushed the central bank to become one of the major sellers sometime in February 2023.
When making payment via this auction it should be noted that the underlying mechanics are similar to the ones at RBZ auction. However, one need not have the ZWL for processing the payment through this auction. Despite authorized dealers have different ways of accepting WBWS bids although the underlying steps are the same:
- Make payment applications using the local currency account to the supplier bank account.
- Attach supplier invoices (with BOEs for credit/part payment of received goods)
- Liaise with authorized dealers to obtain information on availability of funds and allocation.
- The authorized dealer will make allocation and facilitate the settlement of the payment in the currency of the invoice. The rate of the day of allocation will apply.
Both auctions present a greater compliance risk. Keeping a keen ear to the developments instituted by the RBZ regarding the operations of these auctions is of greater importance as it avoids being sidetracked on the good compliance one would have achieved.
This article sums up the available methods of settling current international payments i.e., using free funds (explained in article 1), using the RBZ auction and using the WBWS auction. The next article looks at capital payments processing under the current exchange control regulations.
This article is for information purposes only and can not be used as advice.
