CZI proposes better alternatives to outstanding auction funds
Businesses will face severe working capital challenges if the central bank insists on converting outstanding auction allotments into a two year ZiG denominated non-negotiable certificates of deposit ( NNCDs).
According to the 2024 Monetary Policy Statement presented by new RBZ Governor Dr John Mushayavanhu, following the establishment of a refined interbank foreign exchange market, all outstanding auction allotments will be converted into ZiG and refunded to recipients at the current interbank exchange rate.
The refund will entail the conversion of all outstanding auction allotments into a two year ZiG-denominated instrument at an interest rate of 7,5 percent per annum.
Further, all outstanding payments for foreign exchange purchased by Treasury under the 25 percent surrender requirement will be converted to a ZiG-denominated instrument with a tenor of one year at an interest rate of 7,5 percent per annum.
Dr Mushayavanhu justified the conversion and said it “will allow the new system to start on a clean slate using the interbank foreign exchange system”.
However, the business community is of the view that, the proposed issuance of two-year non-negotiable certificates of deposits for these obligations means that companies will in principle be deprived of desperately needed working capital for that period, holding back production.
A player in the pharmaceutical industry, who requested not to be named, said “the impact is severe for small players because that money was supposed to buy stocks”.
“So if you can’t buy stocks then you are out of business, meaning that you either have to borrow to survive,” said the pharmacists.
He also expressed concern on the 7,5 percent interest rate that is being offered which he feared will be eroded by inflation.
“The jury is still out if after 12 or 24 months ZiG will still be valuable.
Economic analyst and Founder & Executive Officer at SME Association of Zimbabwe, Farai Mutambanengwe said the conversion is disruptive to business.
“Most of that money is working capital, even if it is capex money, the moment you get money that was supposed to buy raw materials now being converted to a 2 year treasury bill, obviously that’s very disruptive to business.”
Busisa Moyo, chairman for the Zimbabwe Investment and Development Agency ( shared the same sentiment and said “the impact will be quite severe because it means that those companies no longer have access to working capital”.
“Some of them are already sitting on legacy debt from the previous times of 2018 on that conversion, so this is withdrawing all that from the private sector working capital,” said Moyo.
Business lobby group, Confederation of Zimbabwe Industries ( CZI) believes the conversion of the outstanding auction bids to NNCDs is an immediate extraction of about US$ 90 million dollars’ worth of working capital from the manufacturing sector.
“The constraint on productive capacity is immense considering the absence and at best high cost of working capital in the market,” said CZI in an NNCD discussion paper seen by this publication. The companies have already sustained significant opportunity costs with the money tied up in unsettled auctions. It will be unfair to load them with additional costs especially given that many other companies have had their auction obligations settled in full via prefunding arrangements.”
The business grouping said instead of converting the overdue auction allotments, there are alternative ways that will enable companies to mobilise funds without having any impact
on ZiG trading.
“We believe that these proposals have no downside risk for Treasury. Indeed Treasury will benefit from increased taxes on the production boost that will result from the proposals,” said CZI.
The Business Member Organisation ( BMO) proposed a set of alternatives to address the issue of outstanding business payments that the central bank want to convert to non-negotiable certificates of deposit ( NNCDs).
The CZI argues that these alternatives will lead to a faster recovery for affected companies compared to relying solely on NNCDs. According to the CZI, their proposed solutions would avoid negatively impacting the Zimbabwean dollar (ZiG) trading, while stimulating the economy by enabling affected businesses to return to full production quickly. Issuing US dollar treasury bills, as suggested in one option, would demonstrate the government’s commitment to upholding the value of the ZiG. This approach is seen as a fairer solution to companies experiencing delays and significant opportunity costs due to unsettled auctions. By settling in USD, the government would signal confidence in the stability of the ZiG, compared to the current practice that some view as expressing a lack of confidence.
Another option proposes allowing companies holding NNCDs to use them for settling statutory obligations like taxes owed to the Zimbabwe Revenue Authority ( ZIMRA) or electricity bills owed to the Zimbabwe Electricity Supply Authority ( ZESA). This would essentially allow businesses to indirectly offset their debts with the Government, potentially preventing market disruptions upon settlement.
Recognising that the blocked USD balances were meant for importing critical supplies, the CZI also proposes converting NNCDs into 360-day letters of credit. This would involve collaborating with one or two local banks to establish a system that grants immediate access to essential raw materials for affected companies.
The CZI emphasises that many companies have already had their auction obligations fully settled through pre-funding arrangements. They argue that using NNCDs exclusively would unfairly burden businesses that were not part of those arrangements. By advocating for these alternative solutions, the aims to accelerate economic recovery through a swifter return to full production for Zimbabwean businesses.