Companies lean against USD sales for survival
ZIMBABWEAN businesses in 2023 experienced two different operating environments, which resulted in companies remodelling their operating models to favour stable US dollar sales to cushion against balance sheet erosion.
The first half of the year was highly volatile, characterised by high inflation and exchange rate issues, while the second half of the year was stable on both inflation and exchange rate; however, until recently, the premium between the official and parallel market rates had widened significantly.
During the second quarter the Government instituted a number of measures, but the master stroke was interest rates, starving the economy of RTGS through gold coins and suspending payments to contractors.
On the other hand, businesses whose models relied heavily on credit sales abandoned offering ZWL credit facilities as they sought a hedge against balance sheet erosion and ultimate business failure due to an inflationary environment and high interest rates.
While there has been a significant slowdown in month-on-month inflation, the year-on-year rate has remained elevated at three-digit figures despite showing signs of easing, albeit on small gains.
Piping products manufacturer, Proplastics, switched its functional currency to USD, but the reporting currency remained ZWL that, however, does not reflect meaningful reporting.
“Management has remained cognisant of the forex challenges and implemented strategies to increase internal foreign currency sales to service foreign suppliers.
“The currency volatility in the market continues to pose challenges for auditors, as the ZWL results do not reflect meaningful reporting,” the company said.
Giant beverage maker, Delta’s half-year 2023, shows that the proportion of forex sales increased to over 80 percent across all segments.
The group commented that consumer spending was buoyant during the period, driven by stable US dollar pricing and improvements in salaries and wages across all sectors.
Most companies intensified cost containment measures and recalibrated their business models as a way of preserving value and building a strong balance sheet for the business.
Clothing retailer, Edgars Stores Limited, said exchange rate volatility coupled with the fluctuations in market liquidity in both Zimbabwe dollar (Zimdollar) and foreign currency continue to create challenges for the group as well as the formal sectors of the economy.
The company said the challenges were particular as they relate to the pricing of goods and trading terms.
The company said high interest rates continued to pose a threat to the viability of companies that rely on debt financing for their operations, as well as affecting capital expenditure plans.
Thembinkosi Sibanda, the group’s chairman, said in a statement of the financials that operating costs increased substantially, mainly driven by a significant increase in allowances for credit losses on the Zimdollar book, whose risk was exacerbated by the increase in policy rates in July of last year.
The industry’s challenges in the year were also compounded by incessant power cuts, which continue to affect production timelines.
Manufacturing processes rely on electric machines that require power to perform precise and repetitive tasks to increase production, with industrialists saying the chronic shortages of electricity are starting to damage the economy.
The costs vary from direct economic costs to indirect costs and social costs. Indirect and social costs are equally important components when considering the impact of power interruptions.
As a result, a number of companies suspended shifts owing to rolling power cuts amid fears the use of expensive diesel generators would increase the cost of production by about 20 percent, delivering the final blow to the already troubled industry.
During the course of the year, companies experienced daily power cuts lasting as long as 12 hours, becoming the order of the day after ZESA lurched into a crisis due to low generation capacity at its hydro-powered station in Kariba and the country’s largest coal-fired plant, the Hwange Power Station.
Elsewhere, the listed companies are worried about the environment, which largely remains complex with uncertain tax positions, creating numerous uncertainties in the treatment of taxes.
The companies in different trading updates said that despite the difficult and challenging trading environment, they have remained resilient, but underlying issues require attention. Innscor Africa, in its 2023 annual report, said there have been substantial changes in the currency environment in Zimbabwe in recent years.
The changes included the reintroduction of the ZWL as the country’s functional currency in February 2019 through SI 33 of 2019, followed by the promulgation of SI 185 of 2020, which reintroduced the use of foreign currency for domestic transactions. “These significant changes have created numerous uncertainties in the treatment of taxes due across the economy and have been compounded by a lack of clear statutory and administrative guidance or practical transitional measures from the tax authorities.
“The wording of existing tax legislation has given rise to varying interpretations of tax law within the country,” Addington Chinake, the group’s chairman, said.
He noted that over time, it has become apparent that the group’s interpretation of the law regarding the currency of settlement for taxes, as well as the methodology for tax computation, has differed from that of the authorities, and this has resulted in a number of uncertainties in the group’s tax position.
In this regard, the group continues to seek adjudication by the courts on these matters.
Industry and commerce also recently highlighted that the government should further ease the tax burden on businesses and individuals through tax adjustments in the upcoming 2024 national budget.
The Zimbabwe National Chamber of Commerce (ZNCC) said tax alignments and incentives will result in a sustainable revival of the economy and employment creation.
“There is a huge disparity in the tax-free threshold in Zimbabwe dollar (Zimdollar) and US dollar terms as local currency earners are being prejudiced, and the tax policy thus lacks fairness, which is one of its basic principles,” it said.
National Foods, on its part, said costs continue to increase in real terms, and the group is largely unable to recover these costs from consumers with a desire to grow volumes.
It said consumer spending power continues to be impacted by the generally constrained liquidity.
“With this in mind, it remains imperative that we continue to drive operational and cost efficiencies across our various manufacturing platforms,” the company said.
The Government has proposed a raft of tax measures crucial to restoring the trading structure, where the bulk of goods are retailed through the formal sector that contributes to the Fiscus.
This comes as major retail players from diverse sections of the economy, like food, clothing, textiles, and footwear, have fallen victim to the sprawling informal sector, resulting in reduced margins and profitability.
Economists have been of the view that the Government is occasionally fomenting the existence of the non-tax-paying informal sector, as it has in some instances instituted statutory instruments that allow individuals and corporations to import merchandise duty-free, which erodes the manufacturer’s wholesale-retail value chain.
However, in the 2024 National Budget, Finance, Economic Development, and Investment Promotion Minister Mthuli Ncube said the business model of micro and small enterprises structurally avoids regulatory requirements that include compliance with taxation.
“It is, thus, crucial to restore the trading structure, where the bulk of goods are retailed through the formal sector that contributes to the Fiscus.
“Therefore, in order to restore the supply chain from the manufacturer, wholesaler, and retailer, I propose that only licensed and tax-compliant operators procure goods from manufacturers and wholesalers,” he said.