Companies reel under currency volatility
COMPANIES are reeling under the impact of the weakening Zimbabwean dollar as evidenced by massive losses in income, threatening their viability.
Gold producer RioZim Limited this week announced it has been forced to stop production of bullion due to the continued loss of the Zimdollar.
RioZim blamed this on the central bank’s policy of gold producers only being allowed access to 70% of their proceeds in foreign exchange and the balance in Zimdollars at the prevailing fixed interbank rate of US$1:ZW$25.
“The interbank rate has been fixed at ZW$25:US$1 while the real market purchasing power of the United States dollars (USD) is allegedly hovering around 80:1,” RioZim said.
“This effectively means that the company is selling 30% of its USd at a rate of 25:1 while the market and the company’s suppliers are pricing goods at in excess of 80:1. This payment mechanism essentially means that the company is getting less than 80% for its gold production compared to the international market price.”
As such, RioZim said what this situation meant is that the company is no longer able to meet operational requirements such as fuel, electricity, salaries, consumables and spares which require United States dollars.
“This means that the company does not have sufficient foreign currency to sustain its operations let alone fund growth,” RioZim said.
On top of all this, delays from the Reserve Bank of Zimbabwe (RBZ) in giving them the Zimdollar component of their export proceeds, at a time when the local currency is fast deteriorating in real terms, has translated to massive value erosion.
As a result of all these factors, RioZim said it was no longer able to operate or it risked making heavy losses if it continued.
This adds to the increasing number of companies making billions of dollars in losses due to the currency volatility and attests to the fact that existing companies that are operating are doing so at a considerable loss-making position.
Government made the Zimbabwean dollar the sole legal tender in June last year through Statutory Instrument 142 of 2019 without key economic fundamentals backing it. This has worsened the loss of value of the local unit and has resulted in runaway inflation breaching the 785% mark.
Recently, cigarette and tobacco manufacturing company, British American Tobacco Zimbabwe posted a loss of ZW$27,7 million for the year-ended December 31, 2019, driven by the erosion of the local unit .
Diversified financial services firm Old Mutual Zimbabwe incurred a massive loss of ZW$2,61 billion for the financial year ended December 31, 2019, due to the depreciation of the Zimdollar.
And in December 2019, telecoms giant Econet Wireless Zimbabwe Limited posted a significant loss for the half year ended August 31, 2019, of ZW$1,28 billion, blamed on the freefalling local currency and forex exchange losses. Last month, these challenges led an insider at Econet to warn that the company’s business viability is now under threat because of the decimation of the local currency's value made worse by the Covid-19 pandemic.
“The loss of revenue is emanating from the surrender requirement which means exchanging USd at 1 to ZW$25 the official exchange rate when the market rate is now around 90,” Confederation of Zimbabwe Industries chief economist Tafadzwa Bandama said.
She said the legacy debt requirement was also affecting companies as, despite it being 1:1, the exchange rate was 1:1, forcing companies to spend more to settle such obligations.
“Now companies need more local currency to fulfil their foreign obligations because of a rapidly depreciating exchange rate. Escalating costs due to a rapidly depreciating exchange rate,” Bandama said. “This whole scenario is worsened by collapsed demand due to the effects of the Covid-19 national lockdown.”
While the RBZ has tried to control the parallel forex market through limiting daily monetary transactions, reducing the transfer amounts, threatening parallel market watchers, and increasing surveillance on black market dealers on social media, all these efforts have been in vain.
The reason behind this approach in dealing with the depreciating Zimdollar is found in a recent statement from the RBZ dated June 12, where it attempts to explain the reason behind the rapid deceleration of the local unit.
“Depreciation in the exchange rate, observed over the past few weeks, was largely a result of behavioural and other non-monetary factors such as negative perceptions, adverse expectations, speculative tendencies of economic agents and tracking of the Old Mutual Implied exchange rate (OMIR), which was quoted at around ZW$140/USD over that period,” the RBZ said.
While these factors do play a role in currency volatility, they are not to blame as textbook economics suggests.
Simple economics dictates that current account deficits, public debt, terms of trade, foreign direct investment, and a strong economic performance are the main determinants of an exchange rate.
In that regard, Zimbabwe’s current account deficits averaging between nearly US$1,5 billion over the past two years, public debt standing at an estimated US$20 billion in real terms and declining foreign investment are depreciating the Zimdollar.
Further, the economy has been contracting by an average of nearly 5% annually in the past three years, according to yearly gross domestic product performance figures from the World Bank.
“No one is willing to hold on to the Zimbabwe dollar, so oversupply of the same is pushing the rate up. RBZ control measures have exacerbated crises,” former Finance minister Tendai Biti said on microblogging site Twitter. “Regime has lost the confidence and control of the market and indeed the people.”
Another factor that is quickly depreciating the local currency is corruption.
“Zimbabwe loses almost US$2 billion a year to corruption; and the latest allegations of non-procedural behaviour by government officials in the acquisition of medical equipment are worrisome,” the European Union in Zimbabwe said in a recent Twitter post.
“The cost of corruption is high, even more so amid a crisis like the Covid-19 pandemic,” added the EU.
According to Biti, corruption erodes market confidence that can also depreciate a currency as this leads to lower foreign investment.
This is especially true in a country whose currency remains un-backed by adequate foreign currency or minerals as is the case with the Zimdollar which needs market confidence to stabilise it.
“What we need if we are to inspire confidence in the local currency for both domestic and foreign investors is a currency that is underpinned by productivity where the RBZ does not release new money onto the streets and the political will to meet corruption head,” business consultant Simon Kayereka said.
“There should be no sacred cows and a strong prosecuting authority reinforced by thorough police investigations. Retailers and manufacturers are not the problem.”