Formal retailers under immense pressure as local dollar exposure increases

Zimbabwe’s formal retail and wholesale sector which are highly exposed to local currency transactions, risk significant pressure on earnings as the economy moves towards full dollarisation.

Mounting ZWL depreciation and inflation have significantly reduced purchasing power as the month of April saw resurgence of economic turbulence in the economy as the local currency continued to slump against the greenback.

The parallel market premium widened from around 65 percent at the beginning of the month to 101 percent at the end of April as the RTGS posted a double-digit decline for the third straight month within the year.

Retailing involves buying from wholesalers or direct from manufacturers, breaking bulk, displaying goods for sale either physically or online, and sometimes delivery. Wholesalers are independent organisations in the distribution channel that buy in bulk and sell to resellers rather than to consumers.

“Whilst the economy is moving towards full dollarisation, there remains a niche of businesses such as formal supermarkets that are highly exposed to the local currency thereby putting pressure on their earnings,” IH securities said in its monthly equity research report.

Economists have blamed the rising prices on the black market, where the US$ is trading at a much higher rate than the official exchange rate.

Investment analyst Rufaro Hozheri, said due to the disparity between exchange rates, customers are opting to purchase from the informal vendors and tuck-shops and at night the CBD turns into an informal market with cars converted into shops.

“This obviously is felt by the formal retailers because the competition has less cost of doing business like IMTT and corporate tax. Eventually volumes are coming off,” he said.

He added customer count in formal retail outlets has dropped, however, it is difficult to ascertain if aggregate demand has slowed down due to the significant informal sector.

Analysts believe lack of access to the cheaper foreign currency provided by the Reserve Bank of Zimbabwe through the weekly auction pushes some producers to opt for the parallel market and then shove the cost down to consumers.

Government has since established an inter-ministerial committee to investigate the causes of the price hikes in a bid to quickly investigate, monitor and make appropriate recommendations to the Cabinet with a view to bringing sanity to the situation of skyrocketing prices.

However, IH Securities said the central bank has been pro-active with management of liquidity in the economy with the most recent introduction being gold backed digital tokens.

According to RBZ, the gold-backed tokens are fully backed by physical gold held by the Bank. Minimum vesting period has been set at 180 days and the digital tokens will be held in either e-gold wallets or e-gold cards tradable also via Person-to-Person (P2P) and Person To-Business (P2B) transactions and settlements.

Holders of physical gold coins, at their discretion, will be able to exchange or convert, through the banking system, the physical gold coins into gold-backed digital tokens.

The Bank also advised that the pricing of the gold-backed digital tokens in foreign currency shall remain the same as the pricing model of the physical gold coins whilst payment for the gold-backed digital tokens or physical gold coins in Zimbabwe dollar shall remain at the current 20 percent margin above the interbank mid-rate.

“Whilst the attraction for gold coins was the arbitrage presented when buying in local currency, the same can be said for the digital gold-backed coins giving incentive for players to willingly surrender their excess RTGS,” the research company said

It added there is however likely going to be a confidence issue with the digital gold coin lowering uptake of the product and hampering intended effectiveness of neutralizing excess liquidity.

“In this regard, pressure on the ZWL in the short term is expected to sustain,” IH said.

Apart from the exchange rate challenges, retailers and wholesalers are subjected to supply value chain issues for instance suppliers are demanding prepayments in forex and where ZWL is accepted, they are subjected to forward rating.

According to the Confederation of Zimbabwe Industries (CZI) the government and private sector need to work together closely to support local manufacturing entities which will churn out competitive goods capable of competing both locally and in global markets in order to help stabilize our economy.ebusinessweekly