Frozen auction, retention funds an industry achillies heel

The country’s export earnings took a 16,90 percent knock last year reducing contribution to foreign currency inflows from 64 percent to 55 percent. But with Diaspora remittances growing by 13 percent to US$1,873 billion and loan proceeds growing by 42,5 percent to US$1,454 billion, the overall foreign currency inflows were down a marginal 3, 7 percent to US$10,9 billion. − Source: RBZ
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Industry might see some smaller companies folding or downsizing due to frozen auction funds on the account of change of currency from Zimbabwe Dollar to Zimbabwe Gold (ZiG) by the central bank.

The Reserve Bank of Zimbabwe (RBZ) governor, Dr John Mushayavanhu, during his 2024 Monetary Policy Statement, said the apex bank will convert all outstanding funds into a ZiG instrument earning interest much to the disarray of industry.

Dr Mushayavanhu said; “Following the establishment of a refined interbank foreign exchange market, all outstanding auction allotments will be converted into ZiG and refunded to recipients at the current interbank exchange rate.

“This will allow the new system to start on a clean slate using the interbank foreign exchange system. The refund will entail conversion of all outstanding auction allotments into a two-year ZiG denominated instrument at an interest rate of 7.5 percent per annum. This process will allow the beneficiaries to maintain the value of their proceeds under the new framework.”

Zimbabwe National Chamber of Commerce (ZNCC) president, Mike Kamungeremu, said the measure is too bitter a pill to swallow for his members as settlement will take two years for funds needed immediately.

“As I represent my constituents, there are certain things that need to be highlighted. We need to refuel. We need to maintain the condition of the currency which we are owed. Some of them will say, I don’t own the money it goes through the auction,” Kamungeremu said.

“Some received the advance payments from customers and those customers are still waiting for delivery. Some are even waiting to sue them. So they feel that the settlement, which will take the next 24 months is a bit too heavy for them hence there is need to look at them.”

Economist, Tinevimbo Shava, believes that the instrument’s tenure might not be feasible for smaller capitalised companies.

“The decision to convert outstanding funds into ZiG denominated instruments by the RBZ reflects a significant shift in monetary policy. While it aims to stabilise the currency, the two-year settlement period poses liquidity challenges for businesses, particularly smaller enterprises,” he said.

Economist, Gladys Shumbambiri-Mutsopotsi, believes the RBZ’s decision to convert outstanding funds into ZiG denominated instruments signals a proactive approach to currency management.

She added: “However, the extended settlement period could strain the cash flow of businesses already facing operational challenges.”

According to Shava it is imperative for policymakers to address the concerns raised by industry stakeholders like the ZNCC. “Balancing the need for currency stability with the immediate liquidity requirements of businesses is essential for fostering economic resilience and growth.”

According to FBC Securities, value of proceeds are preserved though there are downside risks of the currency loses value in the said period. Re-classification of balance sheet items from short-term to long term assets which may impact liquidity profile of those entities is also a risk for businesses. “Fixed return may not be consistent with other investment assets, which may be earning higher than the NNCDs, implying possible opportunity costs or mark to market losses. Opportunity cost also arises if the funds expected from the auction were meant for materials or equipment, which would have resulted in the production of goods or services with much higher returns,” the Securities firm said.

The governor said outstanding payments for foreign exchange bought by Treasury under the 25 percent surrender requirement will be converted into a ZiG denominated instrument with a one-year maturity period and an interest rate of 7.5 percent per annum.

Asset management firm Zimnat said; “This also means that exporters who are owed payments for foreign exchange bought by Treasury under the 25 percent surrender requirement may face significant losses if the value of ZiG depreciates materially in the coming months.

“Against this background, rebuilding confidence in the local currency and exchange rate management system within the business community will continue to be a challenge.”

“While the measure aims to provide a stable framework for currency exchange, businesses must adapt to the new reality of longer-term settlements. Collaboration between the government, financial institutions, and industry players is crucial to mitigating the potential impact on businesses,” Shumbambiri-Mutsopotsi added.

Possible exchange rate losses are on the horizon given that the aging of the outstanding auction allotments varies per institution or customer. Shava added that the move underscores the complexities of transitioning from one currency system to another. “While preserving the value of proceeds is crucial, businesses face uncertainties regarding future exchange rate movements and the impact on their bottom line.”

Shumbambiri Mutsopotsi believes that as businesses navigate this transition, prudent financial planning and risk management strategies will be vital for weathering any short-term disruptions. “The RBZ should provide clear guidance and support mechanisms to help businesses navigate the complexities of the new monetary framework.”

Source: Business Weekly