Casualties unavoidable as liquidity challenge persists

Local businesses are in a quandary as it emerged limited access to finance for working capital requirements will have severe consequences on them such as the downsising of operations and carnage on jobs.

Several manufacturers and businesses are struggling to secure adequate working capital, relying more on expensive short-term borrowings.

In other instances, the lead time to convert reasonable amounts of working capital (ZiG to US Dollars) through formal channels is dragging into weeks, compromising the production value chain for many businesses.

Zimbabwe National Chamber of Commerce (ZNCC) president, Tapiwa Karoro, however, told Business Weekly that access to or the ability of a number of companies to secure adequate working capital, is not a new phenomenon; hence, the private sector has had to be resilient and creative in financing business operations.

“Despite such efforts, it is unavoidable that limited access to finance for working capital requirements will have adverse consequences for businesses, such as the downsizing of operations and job losses,” he said.

Karoro said a broader perspective is required in analysing the intended and unintended effects of policy measures, in this case the prevailing monetary stance.

He noted that casualties will be unavoidable; however, what may be more critical to look at is what the policy objectives are — their attainability versus the potential downside.

“Macroeconomic stability is what we all need, and this will not be easy to achieve, but we hope the monetary policy at this point puts us on a good footing towards that goal.

“If the monetary authorities remain consistent and transparent in the implementation of policy and provide frequent guidance to the market, we may hopefully reduce the number of “casualties” along the way,” said Karoro.

Karoro indicated that, as ZNCC, one of its primary areas of engagement with central and local government has been the cost and ease of doing business.

He said the more cumbersome and costly it becomes to be a compliant business operation, the more it pushes established as well as startup business enterprises into becoming informal operators.

“Areas that require objective review in this regard include our tax regime, operating license application and renewal processes and fees, the plethora of statutory instruments, and the establishment of policy consistency,” said Karoro.

The Reserve Bank of Zimbabwe (RBZ) has vowed to maintain a tight monetary policy stance to control inflation and exchange rate volatility, but this has had an impact on liquidity in both the ZiG and the USD.

This is also in addition to the discontinuation of the RBZ foreign currency auction system, which had become the mainstay for companies to secure working capital. In the process, several companies had their various amounts allotted through the auction locked and converted into a two-year instrument with a 7,5 percent per annum interest, straining most companies on working capital.

Busisa Moyo, the chief executive officer (CEO) of United Refineries, one of the largest integrated edible oil, soap and stockfeed manufacturing

companies in Zimbabwe, told Business Weekly that manufacturers are already laying off workers and cutting back production.

“Liquidity is very tight indeed for both ZWG and USD, which is creating constraints for both the supply side and the demand side and all this in a drought year.

“The manufacturing sector is supported by credit on the supply side and buoyant consumption, which requires decent wages and some credit; both are constrained at present,” he said.

He added that there is a need for some easing on liquidity, a reduction of bank reserve ratios, and other measures to shore up liquidity.

“There is a need to renew impetus on the ease and cost of doing business in both the private and public sectors,” said Moyo.

While liquidity issues persist, banks are believed to hold onto nearly US$3 billion in deposits, but only half of this amount is being loaned out due to factors such as the nature of deposits, the 2028 elections, and the end of the multicurrency system arguably before or in 2030.

Additionally, an estimated number of credit lines contribute another US$300–$480 million.

Despite this availability, banks have only advanced approximately US$1,5 billion, which translates to a low loan-to-deposit ratio compared to regional and international markets.

SeedCo Limited, a leading seed producer in the country, says it is largely funding its business with short-term borrowings from local banks, as a lack of liquidity in the market is impacting its ability to secure long-term facilities for working capital.

Morgan Nzwere, the group’s CEO, said in a recent interview that the short-term borrowings from local banks are a combination of ZiG facilities and US dollars; however, there is no liquidity.

“The banks will sign up a facility with you for US$5 million to fund our business, but when the time comes to draw down that facility and probably say I need US$1 million out of that US$5 million facility, they do not have liquidity. This is what we are finding,” he said.

Nzwere said the group’s borrowings for the year to March 31, 2024, increased to $481,42 billion in historical terms from $24,86 billion in 2024 and were in line with the borrowing cycle of the business and the need to fund delayed collection of receivables.

Economists are of the view that the liquidity crunch is serious in the economy and that it is a cycle, but if it continues like that, companies will need to downsize operations.

Investment analyst, Enock Rukarwa, said market liquidity remains largely thin, banks have been scaling up minimum lending rates to averages around 18 percent, and fixed-term deposit yields have also been increasing, signalling limited liquidity both in ZiG and USD.

He said limited liquidity affects working capital requirements and capacity utilisation and for 2024, it might drop further from the 52,3 percent attained in 2023.

“A contractionary stance is growth-limiting; however, given our circumstances around continued inflationary pressures and exchange rate volatility, an austerity position is a necessary measure in the short to medium term.

“It is not a sustainable policy measure in the long run, and what becomes key is the scientific determination of the efficient period for maintaining such a position,” he said.

Dr Prosper Chitambara, an economist, said liquidity issues are a major challenge for manufacturers and capacity utilisation has been declining since 2022.

“We have already seen how capacity utilisation has declined between 2022 and 2023, but also as a result of a number of factors, including the issue of credit and that trend continues even into this year.

“It’s a major challenge, and this is going to hamper the manufacturing sector in terms of its growth,” he said.

The Government, on its part, has tried to alleviate these concerns by extending the multicurrency tenure to 2030, hoping to instill confidence in the economic landscape. Despite these assurances, the banking sector is still sceptical about lending.

However, Finance, Economic Development and Investment Promotion Minister, Professor Mthuli Ncube, said the arrowhead for financial sector reform is the Central Bank, but the Treasury supports them fully.

He said the RBZ cannot, however, rush and increase that liquidity suddenly in a big way that will trigger inflation and exchange rate volatility.

“We need a proper approach to ensure inflation does not run away and we worry about currency weakness,” he said.

He added, “But also, this is a structured currency after all, you can only increase liquidity to the extent that you have reserves in the first place.”

Mthuli said the first order of business is to build the reserves.

“Upcoming latest figures will show reserves are now at US$370 million compared to where we were in April, there has been a steady increase. So, we are supporting the central bank, but liquidity is the issue and we are very supportive,” he said.

At the introduction of ZiG in April this year, the RBZ’s reserve asset holdings backing the new currency was comprised of US$100 million in cash and 2,522 kg of gold worth US$185 million.

Mthuli said some other Government measures involves increasing the liquidity in the market in terms of access to ZiG cash especially in rural areas where the issue of change and visibility is critical.-ebsinessweekly