Sobering complications of a currency in peril
Zim joins band of economies battling to de-dollarise
THE ramifications of Zimbabwe’s halfhearted efforts to confront currency hurly-burlies have emerged in the past few weeks, relayed by chief executive officers (CEOS) of listed companies, as they update shareholders about the business climate.
Complex tax law interpretations, shifts in the reporting currency and substantial United States dollar liquidity held up at the central bank for unsustainable periods, were among results of Zimbabwe's reluctance to resolve its currency conundrum last year.
However, some of the firms acknowledged the positive spinoffs emerging from desperate moves by authorities to extend dollarisation by a further five years.
But they also see tapering buying power potentially hurting corporations, which only rode out crises in 2023, following proactive interventions by boards, which have learnt from past troubles.
Businesses are continuing to operate under pressure from serious headwinds, as they attempt to navigate the deteriorating environment, which has been compounded by a currency in tailspin throughout 2023, when it surrendered over 800% of its value, according to many analyst estimates.
But the Zimbabwe dollar’s perils are far from over. It depreciated by a cumulative 104% in January and February to mark one of the sharpest rates of battering in the past year.
The Confederation of Zimbabwe Industries (CZI) joined listed companies at the weekend in calling for concrete solutions to a crisis that entered its 24th straight year this January, as fresh jitters pummelled fragile markets due to a brutal drought.
“The delay in coming up with a solution to the currency crisis makes it difficult to protect the currency from rejection by the market,” the CZI said, referring to increasing market resistance against the Zimbabwe dollar.
Annual inflation — whose rate industries say has been severely understated since authorities moved to manipulate it last year — barrelled to 47,6% in February, as the dollar continued its losing streak against the United States dollar.
The rate was 34,8% in January.
Financial statements from companies reporting for the half year ended December 31, 2023 showed the final half of the review period may have been one of the toughest phases of Zimbabwe’s crisis post 2008.
Rampaging inflation, mayhem on the currency front, high utility costs and rolling blackouts frustrated growth, according to statements from four Victoria Falls Stock Exchange (Vfex)-listed blue chips.
The Zimbabwe Stock Exchange listed telecoms giant, Econet Wireless, which reported for the half year ended August 31, 2023, also hinted of the currency crisis, even as it lifted subscribers by 1,2% to 10,4 million during the final quarter.
In an analysis dispatched early this week, analysts at Inter Horizon Securities (IH) agreed that currency turbulence were felt at Econet.
“The operating environment remained challenging for Econet as sub-economic tariffs, amidst a depreciating local currency, continued to threaten the long-term viability of the local telecoms sector,” IH said.
Edwin Manikai, chairperson at the Vfex-listed National Foods Limited said side-shoots of the currency crisis emerged through, such factors as differences in how tax laws were being interpreted.
“As advised in previous periods, there have been substantial changes in the currency environment in Zimbabwe in recent years, including the reintroduction of the Zimbabwe dollar as the country’s functional currency in February 2019 followed by the promulgation of SI 185 of 2020, which reintroduced the use of foreign currency for domestic transactions,” Manika said in a note to shareholders.
Natfoods increased revenue by 3% to US$172,4 million during the review period, after seeing volumes climb a similar margin to 284 852 metric tonnes.
But Manikai said uncertainties remained.
“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,” he said.
“The wording of existing tax legislation has given rise to varying interpretations of tax law within the country.
“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,” Manikai added.
It is a vexing scenario for business, which was also shared by the Employers Confederation of Zimbabwe (Emcoz) last week.
Emcoz said in a shock move, the Zimbabwe Revenue Authority (Zimra) wanted to collect a sugar levy announced in December at US$0,002 per gramme of sugar contained in beverages, even after being revised to US$0,001 per gramme.
Companies say they did not collect the levy when it came into force at US$0,002 cents in January because consultations over its implications were ongoing.
But Zimra appears to assume collections were made during the period of discussions until February 8.
It wants taxes ‘collected’ at US$0,002% remitted until February 8.
“I think there was confusion between the government and Zimra, and Zimra wants to collect the tax,” Demos Mbauya, president of Emcoz, told the Independent.
“The implications of that tax being collected, being levied on companies when it was not collected, is huge. It is quite significant. We are in discussion with Zimra.”
Addington Chinake, chairperson at the Vfex-listed Innscor Africa Limited, said the firm had to restate financial statements for the half year to December 31, 2022, following a change in the reporting currency.
“In line with this change, the comparative period interim report was prepared in USD based on management’s best interpretation of IFRS (International Financial Reporting Standards) and the economic conditions prevailing at that time,” Chinake said in a statement accompanying financial statements for the half year ended December 31, 2023. Innscor’s revenues increased by 20% to US$480,4 million during the review period.
The Reserve Bank of Zimbabwe introduced a foreign currency auction system in 2020 to help companies raise cheaper hard currency for their operations.
The system has been held back by teething problems. Luke Ngwerume, chairperson at the diversified Axia Corporation, shared financial statements for the half year ended December 31, 2023.
He told shareholders that payment gridlocks at the foreign currency auction system saw the firm closing the period with unsettled commitments.
Worries over the currency were also shared at the Vfex-listed Pan-african outfit, Simbisa Brands.
“From September onwards, however, progress was halted with a weakening in the official exchange rates and a growing disparity between the official and parallel market rates, fuelling inflation,” the group said.
Zimbabwe damped its unit and took respite in a multi-currency system adopted in 2009 following years of a relentless assault on the currency by hyperinflation, which reached 500 billion percent in 2008, according to the International Monetary Fund.
A decade later, authorities forced through measures, allowing the Zimbabwe dollar to be the country’s functional currency, after which Statutory Instrument 185 of 2020 gave the market the greenlight to transact in foreign currencies again.
Government said in 2023 it was delaying a plan to end dollarisation in 2025 to 2030, following an outcry.
Taking refuge in a stronger currency is a worldwide trend that is especially rampant in economies smarting from histories of extreme instability, hyperinflation, and large exchange rate depreciation.
A study carried out by the International Monetary Fund in 2022 said “de-dollarisation is a gradual process and requires low and stable inflation for an extended period of time”.
The study looked at countries in the Caucasus and Central Asia (CCA) region, which were at the time at various stages of dollarisation, but were struggling to dedollarise, the process of returning back to domestic currencies.
These countries included Albania, Bosnia and Herzegovina, Bulgaria, Croatia, North Macedonia, Montenegro, Poland, Romania and Turkey, Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Guatemala, Mexico , Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago and Uruguay, Brunei, Cambodia, Fiji, Indonesia, Malaysia, Papua New Guinea, Philippines, Tonga and Vietnam.
“Overall, dollarisation is difficult to reverse, and it requires prolonged and sustained stabilisation policy efforts,” the IMF said at the time.
“The CCA countries need to make their domestic currency appealing, advance financial development and enhance communication by their central banks.
“All countries in the region have adopted specific de-dollarisation measures.
“Based on a qualitative survey conducted for the purpose of our analysis, all countries apply higher reserve requirement ratios for foreign currency denominated liabilities vs domestic currency liabilities.
“In Azerbaijan, reserve requirement differential is 0,5%, while in Georgia it is close to 20%. To better reflect and evaluate the risks associated with foreign currency assets, all countries in the region have introduced macro-prudential and administrative measures.
“They also apply additional capital requirements for unhedged foreign currency borrowers and introduced limits for the overall net foreign exchange position of banks. While there is some room for further regulatory measures to mitigate risks arising from foreign currency lending, particularly in countries where credit dollarisation exceeds deposit dollarisation, countries like Georgia already apply almost all available regulatory tools,” the IMF added.