A gruesome year for business

PHILLIMON MHLANGA

In just a week’s time, there will be closure to a dreadful year.

The year 2021 gave a gruesome account of the operating environment for the business community, whose mood turned from difficulty to desperation.

And the list of woes is considerable.

The business community had to contend with  a painful reality of the volatile Zimbabwe dollar, which depreciated at a faster pace than most projections underpinned by  runaway black market  exchange rates since June.

This culminated in prices of raw materials rocketing.

The business community passed on the burden to consumers by hiking prices of goods and services.  Pricing of goods was linked to the parallel market rate which this week is hovering around ZWL$220: US$1. At the auction system, the rate is at ZWL$108.6: US$1.

Consequently, rocketing prices of raw materials meant that companies had to  cope with constant price revisions.

Apart from that, financial statements that were published by companies during the course of the year showed that companies had to battle a sharp contraction in sales volumes  owing to waning demand.

The majority of companies use the parallel market  rate to price  their goods and services leading to a hike in prices.

The Reserve Bank of Zimbabwe, however, indicated that the rocketing parallel market exchange rate was not reflective of the economic fundamentals of demand and supply.

The central bank said demand of foreign currency was ‘artificially’ too high as the country was generating sufficient foreign currency.

Many concluded that  the depreciation of the Zimbabwe dollar was a driver of inflation which closed November at 58.6%.

This was, however, a sharp decline from 837% recorded last year in July.

Apart from falling  revenues, companies  experienced squeezed margins,  soaring costs and cash conservations, among other challenges.

The business community also battled limited forex,  meaning that companies battled for the importation of critical raw materials.

Local firms struggled to access foreign currency allotted to them at the Reserve Bank of Zimbabwe (RBZ) foreign currency auction system, amid revelations  it has been taking at least two months.

The central bank had hoped the system would deal with the acute shortage of foreign currency in the country. But, captains of industry have said that companies were still failing to access adequate foreign currency from the system, forcing them to source forex from the parallel market where premiums are punitive.

In the event that their bids were accepted, it has been taking more than two months to access the funds, captains of industry said.

This, analysts said, was a reflection of inefficiency in the system.

In light of the glitches being experienced, the central bank governor, John Mangudya accused some companies of abusing the auction system saying:

Several captains of industry also singled out power shortages as one of the biggest drivers of production underperformance this year.

The impact of unstable electricity supply in Zimbabwe, which is one of the country’s most critical challenges at the moment,  came at a time when the government  has been on a drive to lure investment into the country amid fears the power cuts would adversely affect investor confidence.

Manufacturing processes rely on electric machines that require power to perform the precise and repetitive tasks to increase production with experts saying the chronic shortages of electricity are starting to damage the economy.

The costs vary from direct economic costs, the indirect costs and the social costs. Indirect and social costs are equally important components when considering the impact of power interruptions.

As a result, a number of companies suspended shifts owing to rolling power cuts amid fears the use of expensive diesel generators will increase the cost of production by about 20% delivering the final blow to the already troubled industry, according to the Zimbabwe National Chamber of Commerce CEO, Chris Mugaga.

During the course of the year, companies experienced daily power cuts lasting as long as 12 hours, becoming the order of the day after ZESA lurched into a crisis due to low generation capacity at its hydro-powered station in Kariba and the country’s largest coal-fired plant, the Hwange Power Station.

Inefficiencies at the country’s smaller thermal power stations in Bulawayo, Munyati, and Harare have also worsened the situation.

The power utility has also been battling to service debt owed to two regional power utilities, Eskom of South Africa and Hydro Cahora Bassa that hitherto supplied electricity to Zimbabwe to cover its huge deficit.

The Confederation of Zimbabwe Industry (CZI)  said the power cuts were detrimental to the industry.

Availability of power is one of the key cornerstones of increased production and capacity utilisation for industry, if the government entertains chances of successfully attaining vision 2030, according to experts.

The deadly Covid-19 pandemic  also dealt companies a financial blow.

The virus pushed business to the brink, forcing companies to lay off thousands of workers, throwing them onto the streets.

A gruelling lockdown turned business to the breaking point. No occupation was safe from furloughs and layoffs caused by the devastating Covid-19 pandemic.

The job cuts were massive. When summer arrived, there was a glimmer of hope. But business is now grappling with the fourth wave. It means the worst of the pandemic is yet over.

CZI president Kurai Matsheza admitted the operating environment  in 2019 was tough.

“The currency question and currency availability at the auction has been the major issue impacting business performance in 2021. The Statutory 127 was also a major setback for business,” Matsheza told Business Times this week.

He added: “Although power availability was stable in the first half, towards the end of the year the load shedding became very punishing to production activity.”

The  president of the Confederation of  Zimbabwe Retailers, Denford Mutashu, said the year was complex and quite unpredictable owing to the Covid-19 pandemic that saw successive level  4 hard lockdowns reducing customer movement .

“Operating hours were reduced , costs piling against declined sales volumes.  Landlords continued to demand full payment of rentals both at commercial and domestic level. Real disposable incomes remained subdued affecting aggregate and effective demand. Some businesses found the going tough as wages and salaries costs piled,” Mutashu told Business Times.

He added: “The foreign currency parallel market exchange rate has remained an Achilles heel for the sector as the country’s informal sector continues to grow.”

The currency volatility has also resulted in financial experts raising a red flag over the relevance of financial statements produced in Zimbabwe as they either show gross misstatements  or not making sense.

They are  concerned that the financials were moving away from fair presentation.

Third parties  such as financiers and suppliers rely on financial statements to engage in business with the entity.

Financial statements are also  useful in making economic decisions.

They are also important  to investors  because they can provide enormous information about a company’s financial health, at a particular point in time, giving insights into its performance, operations, cashflows and overall conditions.

Shareholders also need them to make informed decisions  about their equity investments.

Zimbabwean companies are not able to comply with International Accounting Standards (IAS) 21 as the accounting profession is seized with the currency consideration since the issuance of Statutory Instrument 33 of 2019, which among others, prescribed the accounting for RTGS balances, bond notes and the United States dollar. The law, however, clashes with IAS 21.

The mandatory adoption of IAS 29 has also increased complexity in the accounting system.

The complexity  was also caused by the difficulties to compare  financials between periods, meaning the prior year comparatives for both monetary and non-monetary  items  are to be restated  in terms of measuring unit current of the end of the latest reporting period.

The other challenge with hyperinflation reporting  is that there is now more work for preparers and more costs for companies as they seek the advice of experts outside the company.

In almost all financial results  published over the past few months, there have been undesired  adverse or qualified audit opinions issued by auditors over the past year owing to departure from generally accepted accounting standards.

Given the complexities, it  was difficult to have clean audits, which would provide reasonable  assurance that the financial statements are free from material error.

Such would guarantee  the entity’s future solvency. During the course of the year, the Insurance and Pensions Commission launched a new solvency regime, the Zimbabwe Integrated Capital and Risk Project (ZICARP).

Under ZICARP,  insurance companies are now required to transition to risk-based supervision.