Zimdollar credit sales fast fading away

Zimbabwean businesses whose models relied heavily on credit sales are slowly abandoning offering ZWL credit facilities as they seek to caution against balance sheet erosion and ultimate business failure due to an inflationary environment and high interest rates.

The Central Bank is determined to maintain the bank policy rate and medium-term lending rate at their levels of 200 percent and 100 percent, respectively and has vowed to maintain a tight monetary policy stance.

While there has been a significant slowdown on month-on-month inflation, the year on year rate has remained elevated at three digit figures despite showing signs of easing, albeit on small gains.

Within the economy, businesses that offer credit sales have proximity in the clothing sector, household furniture, plant and equipment sectors.

Zimbabwe Stock Exchange (ZSE) listed clothing retailers, Truworths Limited and Edgars Stores Limited, have since taken positions on the issue of ZWL credit accounts.

Truworths in a trading update this week said it has suspended all Zimbabwean dollar credit sales occasioned by the tight monetary regime.

Chief executive officer, Bekithemba Ndebele, said the trading environment has remained complex and uncertain and it is poised to review interest rates in the first quarter of 2023 as dictated by inflation developments.

Businesses on their part have been calling for interest rates to be lowered because they are stifling aggregate demand.

Retailers Association of Zimbabwe chairperson, Peggy Rambanepasi, told Business Weekly the reason for ditching ZWL credit sales by businesses has been mainly the high interest rate.

“The reason is the high interest rates which make borrowing to fund credit in ZWL unsustainable for both the credit provider and the consumer. “Business revenues and profitability will go down due to reduced volumes,” she said.

She noted that affordable credit is one of the biggest enablers for customers to acquire products hence the solutions by authorities are to reduce interest rates to sustainable levels, restore confidence in the ZWL which will lead to local currency stability and low inflation.

Analysts have often warned that if the current status persists in the medium to short term, consumer confidence and effective demand will decline.

Government has over the past few months instituted a plethora of measures in an effort to stabilise inflation and exchange rate volatility.

Among the measures include the decision to suspend payments to contractors, government agencies and departments which it accused of active participation in the deteriorating exchange rate.

Apart from currency challenges, retailers have been facing other cost pressures stemming from the switch to expensive diesel-powered generators, as state-run power producer, ZESA, battles to keep its ageing plants running.

The power cuts have been disturbing operations and companies have made serious losses as some of the products had to be thrown away after the product goes bad in storage caused by unplanned power disruptions.

Investment analyst, Enock Rukarwa, said the obtaining economic dynamics of policy inconsistency especially around the interest rate regime have negatively affected many businesses including banks through failure to replace stocks.

He said the absence of credit sales will have an adverse effect on nominal revenues but it is a worthwhile business consideration in light of elevated cost of borrowing and inflationary pressures.

“Policy consistency and relative economic stability are key enablers for strategic retailing strategies like offering credit sales; however, current conditions haven’t been encouraging enough for business organisations,” he indicated.

Edgars Stores Limited has reportedly said was expanding its business portfolio by adding USD credit accounts and cash purchases.

Edgars Limited Group Financial Services Executive Alexander Timburwa recently said the retailer introduced a USD account option in addition to the existing ZWL accounts.

Furniture and electronic appliance company, TV Sales and Home, is also reportedly preferring USD and cash payments compared to ZWL credit facilities.

The retail unit is a subsidiary of retail and distribution specialty group Axia Corporation Limited (Axia), which has set its sight to migrate its shares to the USD-denominated stock exchange, the Victoria Falls Stock Exchange (VFEX) from ZSE.

Axia has three operating business units, namely TV Sales & Home (TVSH), Transerv and Distribution Group Africa (DGA).

Eddie Cross, an economist said the parallel market rate is approaching $950 to $1 and this rapid devaluation of the local currency is increasing the risk to businesses of sales in the currency.

He said the main concern is that this is effectively destroying the domestic dollar and the economy is dollarising.

“This will reduce the competitiveness of local industry and encourage imports and smuggling – the combined impact on local business will be severe,” he said.

He added that the only solution is to liberalise the market and allow the market to determine the exchange rate and make the local currency the sole currency of transaction.

He indicated authorities should suspend exchange control to all market forces to operate freely.

Another economist, Dr Prosper Chitambara, said offering credit in an inflationary environment disincentives the creditor and benefits the debtor, therefore as long as there is high inflation, the incentives for creditors to lend in ZWL is reduced because inflation by its nature is an indirect tax.

“Therefore, in an inflationary environment the debtor benefits while the creditor actually subsidizes the debtor,” he said.

He added that inflation also creates a lot of uncertainties for business and more work needs to be done to bring annual inflation lower and that will ensure a return to normalcy to reverse some of the trends.

“At the moment it makes sense for businesses to reduce their credit facility to safeguard their businesses,” he said.

Vince Musewe on his part said where there is lack of confidence companies would not risk their money hence cash and USD sales become more attractive.

“Therefore, the solution would be to offer credit only in USD,” he said.

In June this year, Government gazetted Statutory Instrument 118A of 2022 entrenching the multi-currency system into law and this measure is running for the duration of the National Development Strategy 1 (2021-2025) (NDS1).-ebusinessweekly