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Currency crisis hits company operations

Opinion & Analysis
In an all too familiar scenario, the depreciation of the Zimbabwe dollar has accelerated in recent weeks,  reaching $650 to the US dollar on the parallel forex market after hovering around US$1:$400 for a bit.

BY TATIRA ZWINOIRA THE rapid depreciation of the Zimbabwe dollar has affected operations at the country’s listed firms.

In an all too familiar scenario, the depreciation of the Zimbabwe dollar has accelerated in recent weeks,  reaching $650 to the US dollar on the parallel forex market after hovering around US$1:$400 for a bit.

Similarly, the official forex auction and interbank rates for the local currency have reached $338,49 and $347,31, respectively, to the US dollar from a comparative of $258,54 and $293,27 three weeks prior.

This is evident in the country’s three largest companies, financial firm, CBZ Holdings Limited as well as the beverage manufacturer and Delta Corporation Limited, along with Econet Wireless Zimbabwe, the telecoms outfit.

Just recently, CBZ announced it experienced a near 5,5% decrease in profit after tax to $7,7 billion in the year ended December 31, 2021 from a 2020 comparative of $8,15 billion.

This was because the Zimbabwe dollar depreciated by 33% from 2020 to 2021.

Resultantly, the group saw its monetary loss widen by nearly 511% to $7,15 billion in the period under review, from a 2020 comparative of $1,17 billion.

It also resulted in credit losses widening by about 382% to $7,33 billion last year, from $1,52 billion in the prior year.

Thus, the decline in profit after tax for the period under review, continued into the first quarter of 2022.

In its results for the quarter ended March 31, 2022 CBZ took a near 68% knock to its profit after tax to $929,2 million for the first quarter, compared to the 2021 comparative owing to inflation.

At the end of the 2021 first quarter, CBZ posted a profit after tax of $2,86 billion.

During March, the Zimbabwe dollar depreciated to $142,42 against the US dollar, down from $84,40 at the end of the comparative 2021 period.

In the financial statement for the year ended March 31, 2022 beverage manufacturer, Delta Corporation Limited (Delta), reported widening of net monetary loss by nearly 197% to $7,64 billion from a prior year comparative of $2,57 billion.

“The Zimbabwe businesses have relied mostly on foreign currency obtained through the sale of products on the domestic market in line with the multicurrency framework.

“There is a significant disparity between the auction exchange rates and the rates reflected by comparing the market prices of goods and services quoted in alternative currencies,” DCL said, in a financial statement attached to the results under review.

“International Accounting Standard 21 (IAS21 — The Effects of Changes in Foreign Exchange Rates) requires an entity to determine the functional currency based on the economic environment in which it operates.”

Delta added: “The entity does not believe that the official exchange rates prevailing during the financial year were, at all times, fairly reflective of the currency exchangeability and as such, has used an estimation process, which is allowed by IAS 21”.

The beverage maker said, therefore, the exchange rate applied in translating the revenues to the reporting currency and as the spot rate used in translating other foreign currency denominated transactions, at times, differed from the official rates.

The difference was typically higher as experts believe the official forex rates do not reflect the true value of the Zimdollar.

“In historic cost terms, earnings before interest and tax grew by 150% over last year to $21,60 billion. There was some impact from the distortions in exchange rates applied by suppliers and the rebasing of certain costs and increased business activities as the COVID-19 restrictions were relaxed,” Deltasaid.

The only reason why the beverage maker managed to avoid taking a hit on its profit after tax was due to it earning over 50% of its revenue locally in foreign currency, thus making more gains on the conversion of this currency.

The company recorded an exchange gain of $2,32 billion.

Delta is the second biggest listed company on the Zimbabwe Stock Exchange, valued at $531,04 billion.

Concerning Econet Wireless Zimbabwe, though it has not yet released its results for the full year ended March 31, 2022, in its half year report ended August 31, 2021, it raised concerns on the impact the decline in the local currency would have at the end.

“Subsequent to the period end, the Zimbabwe dollar (ZWD) significantly depreciated against the United States dollar (USD). The abridged consolidated interim financial statements were authorised for issue on 23 November 2021 when the exchange rate was USD 1 to $105,70,” Econet said.

“The depreciation of the exchange rate from USD 1 to $85,91 at the reporting date, 31 August 2021, increases the impact of exchange losses recognised in the statement or profit and loss and other comprehensive income.” During the period, Econet recorded exchange losses of $481,07 million.

While the company overturned its loss-making position to post a profit after tax of $6,58 billion, from $127,68 million loss in the comparative 2020 period, this growth was mostly inflationary.

“Percentage changes on statement of profit or loss line items are based on the 31 August 2020 results and the statement of financial position line items on the 28 February 2021 results,” Econet said.

Another firm that widened its net monetary loss was Nampak Zimbabwe Limited (Nampak), a plastic and metal can manufacturing subsidiary of the South African firm, Nampak Limited.

In its recent half year financial report for the period ended March 31, 2022 Nampak widened its net monetary loss by nearly 152% to $473 million compared to a 2021 comparative of $187,9 million.

This caused a reduction on profit after tax to $154,97 million in the period under review from a 2021 comparative of $541,83 million.

“The overall situation facing the economy remains fluid.

“We note with concern the recent significant devaluation of the official auction exchange rate, and wait to see what impact this will have on prices and inflation,” Nampak said.

“More needs to be done by the authorities to address the macroeconomic challenges faced by businesses.”

As more companies reveal their financial results, the common theme is that the depreciation of the local currency is hurting businesses and, in some cases, knocking profits.

  • This article was taken from the WeeklyDigest, an AMH digital publication