Ghosts of 2023 back to haunt us?

FORMAL retailers have found themselves in a quandary again regarding pricing models to use in the highly volatile market after the domestic currency exchange rate resumed its free fall, making it difficult for traders to comply with regulatory guidelines on pricing.

While the ripple effects of the currency volatility have started unraveling across the market, Business Weekly has it on good authority that one foreign-owned grocery chain has been hit the hardest and is mulling closing some of its branches.

The retail chain has been repeatedly slapped with penalties by authorities for violating pricing regulations. The most recent runs into several tens of thousands of US dollars or the Zimbabwe dollar equivalent, at the ruling exchange rate.

Having once considered moving the head office to Zimbabwe in 2019, amid the bright prospects then, senior executives at the retail chain have reportedly changed heart, evening contemplating closing some branches.

The Confederation of Zimbabwe Retailers (CZR) could not be reached for comment by the time of going to print yesterday.

But an industry player who spoke on condition of anonymity described the prevailing situation as a “near market failure”, adding this could come to pass if no immediate action is taken to address the misaligned fundamentals.

The well-placed industry source also said one large distributor halted its expansion plans in 2022 when the Government promulgated legislation compelling registered traders to use the official exchange rate plus a margin of 10 percent when setting prices, which are often linked to the greenback exchange rate.

Zimbabwe’s retail space is dominated by giants Choppies, which is registered in Botswana, TM Pick ‘n Pay − a joint venture between Zimbabwe’s TM Supermarkets and South African retail group Pick ‘n Pay and OK Zimbabwe.

Leading distributors or wholesalers include Gains Cash Carry, Metro Peech, N Richard and Trade Centre.

Part of the distortions in the market have their roots in the shortage of foreign currency required for key imports amid suspicion that there is a palpable increase in domestic currency liquidity, which has manifested in the bull run on the Zimbabwe Stock Exchange.

Treasury has hitherto, however, refuted that there is an imbalance between local currency liquidity and foreign currency, insisting Zimbabwe’s external sector performance continues to perform well, which should make the local currency stronger.

By mid-last year, the Zimbabwe dollar had lost nearly 81 percent of its year-opening value against the greenback, sending price shock waves across the economy as inflation ran riot in response.

Statutory instrument 118A of 2022 compels registered traders to price their goods using the formal exchange plus a margin of 10 percent, which authorities put in place to curtail unjustified price increases in the country.

But staying within the parameters of the law is proving a difficult proposition for many formal retailers, as the fast depreciating Zimbabwe dollar exchange rate against the US dollar means that, once again, they are always chasing a fast moving target.

The Zimbabwe dollar has already lost significant ground against the greenback this year, both in terms of the formal and open market exchange rates.

After closing the year 2023 around $6000/US$1, the official exchange rate has climbed above $10 000 to the greenback. The Zimbabwe dollar is currently changing hands circa $16, 500 to the US dollar on the parallel market.

What also makes it difficult for traders to stay within stipulated trading parameters is that most suppliers and manufacturers demand to be paid in foreign currency, to cushion themselves against the unpredictable local inflation trends, given that a significant part of their raw materials and even some products are imported.

Market watchers told this publication that in the few instances, manufacturers or suppliers accept payment in local currency, they prescribe stringent conditions such as cash or charge punitively high prices (also known as forward pricing) to stay ahead of inflation.

Amid the growing pace of Zimbabwe dollar depreciation, registered retailers have had to improvise and that entails setting prices using open market exchange rates, although this violates pricing regulations, which compel them to align prices to the official rate, plus a 10 percent margin.

Businesses faced a similar nightmare last year when the domestic currency depreciated rapidly during the first quarter of the year, sending prices through the roof and inflation rates climbing to record levels.

Authorities swiftly responded by issuing a raft of policy measures to restore stability and sanity in the market.

The interventions included hiking interest rates to record highs, transferring external debt servicing duties to the Treasury, payment of duty for luxuries in forex, and settlement of 50 percent of income tax in hard currency while most Government charges had to be done in local currency.

Following the interventions, the market witnessed a modicum of stability, but lasting only until December last year when the exchange rate started to gradually pace up, with observers and market players saying the prevailing rate of depreciation is not sustainable.

“It is a complex one, what it should indicate is the limited availability of foreign currency against the local currency,” the industry executive said, adding the situation mostly affects formal retailers. Informal traders use the market rate or demand US dollars in most instances,” he said.

Importers continue to access foreign currency on the auction market, which was installed in 2020 to ensure efficient distribution of forex in the market. It has allotted over US$4,2 billion to various critical sectors.

However, the auction has not resumed since taking a break in early December leaving the interbank market as the only official source of foreign currency.

Auction allocations, which at one point averaged US$20 million to US$30 million, have fallen drastically since the Government introduced the willing buyer willing seller interbank system under which it sold forex to banks to sell to the market.

The industry executive said the exchange rate volatility affected mostly formal retailers who are bound by law to follow legislated pricing guidelines.

“It affects formal retailers mostly because they are forced to apply the official exchange rate when pricing yet no supplier, if they are there they are very few, can give you products in the local currency. If they do so there is also an element of forward pricing.

“It then becomes difficult for the retailer or wholesaler to do the balancing act of complying with Statutory Instrument 118A of 2022, which stipulates the official exchange rate plus 10 percent cap. It is quite unfortunate,” the source said.

The situation has created financial challenges for most formal retailers, who can no longer pay upfront for goods and services while suppliers and manufacturers also keen to accept local currency or offer terms for Zimbabwe dollar payments.

This comes as Zimbabwe’s economy continues to self-dollarise.

“I think we have got a near market failure, which requires fundamental changes to monetary and fiscal trajectory because so far there have been a lot of concerns from several businesses, whose indication the budget did not need to do much.

“The Government simply needed to repeal the statutory instrument that compels businesses to apply the official exchange rate plus 10 percent cap or at least, if the Government is not willing to repeal it completely it could move the cap from 10 percent to around 25 percent. The Confederation of Zimbabwe Industries proposed that businesses trade at a 20 percent discount to the market rate.

Economist and Small Enterprise Association of Zimbabwe (SMEAZ) chief executive officer, Farai Mutambanengwe, said the impact of the increase in the exchange rate was the increases in prices of goods and services.

“…goods that we consume are imported or if they are locally made they still have a high import content.

You know that people now peg prices to the US dollar. An increase in the exchange rate will result in an increase in prices.

“There is only one thing that causes the exchange rate to increase in the manner that it is doing now, and that is an increase in money supply. In other words, there is printing of money.

“All it means is that somewhere, somehow, there is money coming into the system; more Zim-dollars coming into the system to chase the same amount of US dollars and so, naturally we get a depreciation of the local currency,” he said.-ebusinessweekly