Business to suffer heavy losses on exchange rate movement

Economic agencies that are betting against Government policies are likely to suffer heavy losses as Treasury remains adamant that the current policy measures and the firming local currency trajectory will continue for longer.

Some businesses are still using exchange rates of between $8 000 and $11 000 per greenback in their pricing despite the official exchange rate firming to below $5,000.

Parallel market exchange rates have also firmed to below $8 000 per US dollar.

However, some economic agencies argue that selling at the new exchange rates will see them record huge exchange rate losses given they stocked when rates were too higher.

Instead, the businesses are choosing to hold on to their stocks, pricing their products at rates double the formal exchange rate.

In the process, aggregate demand has tumbled with fewer customers at the tills.
While some of the businesses are happy to keep their merchandise priced at higher exchange rates than sell at a loss, there is risk that they will eventually suffer huge losses if the current trajectory lasts longer than they are anticipating.

In its quest to achieve lasting price stability, the Government recently introduced the wholesale foreign currency exchange auction system which allows banks to access foreign exchange at market-determined exchange rates for onward transmission to their customers.

This liberalised trading environment allowed the market to stabilise while at the same time, the Zimbabwe dollar appreciated.

The local currency reached a peak weakness of $6 926 per US$1, but has since firmed to US$4 999.

However, market players have little confidence that the current stability will last for longer. Anticipation is that the rate will soon run again with the possible trigger being increased salaries for civil servants and payment of suppliers.

Authorities, however, say such fears are misplaced and those still thinking otherwise, are betting against Government policy which might backfire.

Secretary for Finance and Economic Development, George Guvamatanga, yesterday said the Government is still meeting its obligations and “paying contractors and suppliers”.

He dismissed the notion that there is a liquidity crunch in the market as the local currency is readily available at banks, RBZ and from Government.

“There are lots of Zimbabwe dollars because as Government, we are still paying our contractors, we are still paying our suppliers, it’s only that they are looking at the wrong place (for the Zim dollar).

He said firms that are pricing using rates of more than $8 000 cannot claim that there is a liquidity crunch when they are pricing themselves out of the market and out of the Zimbabwe dollar.

Guvamatanga said most firms are struggling to price their products because they have never experienced a firming currency.

“Most executives, finance directors and those in treasury departments, have no experience of a strengthening currency and do not know what to do.

‘They are used to one-way forward pricing and this is reflected in the market right now. Well-trained officers would have reached their stop-loss positions,” said Guvamatanga.

A stop-loss is designed to limit trading losses on inventory holdings. For example in equities, a stop-loss order is an order placed to buy or sell a specific stock once the stock reaches a certain price.

Wholesale auction sustainability

Commenting on the sustainability of the auction trajectory, Guvamatanga said contrary to reports that only Government was officially selling foreign currency at the official exchange rates, the market had sold more than the former.

“The market sold to their banks more than U$110 million while Government has sold US$67 million.

“Voluntary liquidations are almost 100 percent of what we have supplied. So the market is already clearing on its own,” said Guvamatanga.

“All this money has been traded around the official exchange rate. It shows the new auction has the support of exporters because this is the first time we have seen this level of liquidation,” he said.

Bankers Association of Zimbabwe president, Lawrence Nyazema, said the market had experienced high levels of liquidation than before.

He, however, said as the rate has been coming down, there have been fewer liquidations. He said with exporters already surrendering 25 percent of their foreign currency earnings, there is no strong motive to liquidate more.

“Most of them (exporters) have adequate Zim dollars from their 25 percent surrenders. So we then need ordinary people to come into banks and kill the parallel market.”

Nyazema said it will take at least two months to have one market, which is the interbank market.

“Let’s provide those small transactions in our branches and bureau de change. Once we have done that, we will see a lot of supply coming in voluntarily to the banks.”

Wholesale and retail sector experts say holding inventory on the shelves longer than expected could be more costly if the current trajectory continues for much longer.

Low stock turnovers can tie up a significant amount of a company’s capital in inventory and this can limit the availability of funds for other important business activities such as investing in growth opportunities or meeting short-term financial obligations.

Further, holding onto inventory for longer periods can lead to increased carrying costs such as storage, insurance and potential obsolescence.

“If products are not being sold quickly, it may lead to a delay in receiving payments and affecting the company’s ability to meet its financial obligations.”

An executive with one of the country’s major wholesale outlets, Archie Dongo, said by holding inventory at higher rates, one risks losing out to competitors getting the same product at lower prices than what one is selling at.

He said businesses have the option to renegotiate invoices with suppliers so as to stimulate sales.

“You then go back to your suppliers and say you used a higher rate to sell this product to me, now that the rate has come down, can I have a new invoice at a more reasonable price for this environment? So you get re-invoiced, you adjust your price, and you start moving stock at the new lower price.

“The second option is to use the replacement costing method just the same way it was used when the exchange rate was going up. What you are trying to do is stimulate sales so that you can keep the stock moving for both the supplier and the retailer.”

However, Walter Mandeya of Trigrams Investments, said it is not fair for Government to expect immediate changes.

“It will take time and I think consumers should be trusted to make correct economic decisions on which businesses to support.

“As it stands, there is a lot of inventory that was purchased at the higher official exchange rates and the appreciation in the exchange rates will take time to filter through the economy as inventories and manufacturing processes are replenished. Prices will gradually drop as consumers resist buying overpriced products in the local currency,” said Mandeya.

-ebusinessweekly

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