Zimbabwe Foreign currency shortages to persist throughout 2018

January 15, 2018
| Report Focus News

Foreign currency shortages are expected to persist throughout this year despite promising economic turnaround following the inauguration of Emmerson Mnangagwa as Zimbabwe’s President late last year.

| Report Focus NewsMarket experts, Equity Axis, said local companies should brace for further dire shortages in 2018 and find innovative ways to remain profitable.

Statistics from the Reserve Bank of Zimbabwe reveal that the country had a backlog of $600 million by September last year thereby affecting companies’ capacity to retool and also resulted in shortages of critical medicines.

“In 2017 one of the most top dampeners of company performances and threat to operational viability was low forex availability which militated against timeous sourcing of raw materials, settlement of foreign creditors and banks’ ability to meet depositors cash needs on time,” the investment advisory firm said.

Equity noted that the depletion of foreign currency curtailed expansionary plans of pan African firms such as Simbisa and SeedCo and reduced capitalisation and retooling plans for other companies.

“This inability to retool, expand, restock and capitalise shed a great deal of value in terms of potential earnings that could have otherwise been earned. Despite encouraging current account numbers, this phenomenon is likely to remain with us in the very near term,” the company said.

Zimbabwe received a $600 million nostro stabilisation facility from the Afreximbank in December last year to help the country clear the foreign payments backlog, but the effects are yet to be felt as bond notes and real time gross settlement system have continued to lose ground against the world’s major currencies that are now finding their way onto the black market.

The South African rand and the American dollar are still traded profitably at black-market spots dotted around Harare and Bulawayo after the central bank failed to satisfy the increasing demand for foreign currency.

Companies that fail to get foreign currency allocations from the central bank are resorting to the parallel market where the greenback has firmed against the bond notes.

The US dollar is trading at US$1:$1 on formal banking system. This is, however, in stark contrast to the parallel market where it is fetching up to $18 in bond notes and $45 in RTGS transactions.

Analysts say the resurgence of a parallel market has been caused by the country’s low exports and stringent and “discriminatory” foreign currency allocation system.

“Given the circumstances it is of paramount importance that companies refocus their models with a view of supplying regional markets so as to earn forex, which in turn may either be used in retooling, foreign denominated debt repayment or working capital purposes such as stocks replenishment,” Equity said, adding that local companies therefore need fresh equipment in order to compete both in the local space and in the export markets.

“Local processes are generally inefficient meaning they are costly and yet produce less in volume terms relative to other producers in the region and beyond. Our companies therefore need to secure funding to procure modern equipment which is cost-efficient so as to achieve competitiveness. Such capital best comes in the form of rightly priced debt or equity capital through strategic partnerships that facilitate procurement of the right equipment,” the advisory firm said.

Equity, however, warned that the choice of debt or equity will need to be further assessed on the merits of each after considering the company specific conditions like ability to generate foreign currency from the end products to service the loan.

“The biggest challenge we have seen is that of major shareholders refusing dilution hence the tendency to shy away from the equity option and opt for debt often without considering the danger that their business may not have capacity to generate foreign currency to service an international debt,” the company said. DailyNews