Policy turmoil chokes sugar giant

CLOUDINE MATOLA

Zimbabwe’s policy inconsistency and currency volatility are dealing a severe blow to the country’s corporate sector, with sugar producer Hippo Valley Estates sounding the alarm over escalating financial pressures.

The Zimbabwe Stock Exchange-listed company warns that the unstable monetary landscape—characterized by an erratic exchange rate, tight liquidity conditions, and policy flip-flops—has eroded profit margins and crippled its ability to reinvest in operations.

In its trading update for the third quarter to December 31, 2024, Hippo Valley painted a grim picture of an economy struggling under its own weight.

Despite the Reserve Bank of Zimbabwe (RBZ) launching the Zimbabwe Gold (ZiG) currency to stabilize the local unit, exchange rate distortions persist, leaving businesses like Hippo Valley in an uphill battle to maintain financial viability.

The turbulence in Zimbabwe’s financial system has hit companies hard, forcing them to navigate a treacherous terrain of fluctuating exchange rates, inflationary shocks, and liquidity constraints.

Hippo Valley noted that the depreciation of the Zimbabwe Gold (ZWG) currency—plunging by 45% in the last quarter alone—has exacerbated the already fragile economic conditions.

“The business environment remains challenging on the back of inflationary pressures, exchange rate volatility, tightening money supply, and the currency mix dilemma between the ZWG and the US dollar,” Hippo Valley stated.

At the launch of the ZiG IN April last year, the official exchange rate stood at US$1:ZWG13.56, but by the end of December, the rate had deteriorated to US$1:ZWG26.09.

The central bank’s attempt to stem the tide by hiking statutory reserve requirements and raising interest rates has done little to ease the strain on businesses. Instead, these measures have stifled liquidity, making it harder for firms to access working capital.

For Hippo Valley, this environment has significantly diminished its ability to retool operations, meet foreign currency obligations, and sustain profitability.

The company is heavily reliant on imports for essential goods and services, yet its US dollar revenue generation remains insufficient to cover expenses.

“These complexities have placed immense pressure on the company’s profit margins,” Hippo Valley lamented.

“The need for foreign currency remains high due to working capital requirements for critical imports, cane supply, and manpower costs, most of which are USD-denominated, while the company struggles to generate enough USD from normal sales.”

Faced with dwindling profit margins and an increasingly suffocating operating environment, Hippo Valley has been forced to adopt drastic measures to safeguard its financial stability.

One such initiative is Project Zambuko, a restructuring strategy aimed at streamlining operations and reducing costs.

As part of this plan, the company has initiated a phased retrenchment exercise to cut down on labour costs.

The layoffs, set to unfold in three phases, will begin at the end of February 2025, followed by further job cuts in May and August.

The retrenchment process is being conducted in line with Zimbabwe’s labour laws, but it underscores the deepening crisis facing the corporate sector.

“In response, the company embarked on a number of strategies to avoid further depletion of profits and improve the capacity to generate positive cash flows that are necessary for business continuity, particularly Project Zambuko,” Hippo Valley said.

The move highlights a broader corporate distress trend, as businesses grapple with the fallout from Zimbabwe’s fragile monetary policies. With operating costs spiraling and revenue streams squeezed, firms are left with little choice but to slash their workforce, freeze expansion plans, and cut non-essential expenditures.

Beyond currency volatility, Hippo Valley is also entangled in a legal battle over the government’s recent decision to alter the Division of Proceeds (DOP) framework.

Under the new arrangement, private sugarcane farmers are allocated 80.5% of the revenue, while millers like Hippo Valley receive just 19.5%.

The sugar producer has contested this adjustment, arguing that it undermines its financial sustainability and disrupts industry dynamics.

The company has since filed an appeal with the Supreme Court against Industry and Commerce Minister Mangaliso Ndlovu, challenging the fairness of the new revenue-sharing model.

“The company filed an appeal regarding the recent adjustment to the DOP arrangements under the cane milling agreements, which increased the DOP allocation to private farmers. Further updates will be provided when available,” Hippo Valley said.

This legal standoff reflects a broader trend where government interventions in private-sector affairs are breeding uncertainty and discouraging investment. By shifting more revenue to private farmers at the expense of millers, policymakers may have inadvertently disincentivized further investment in the sugar sector.

Hippo Valley’s struggles are emblematic of Zimbabwe’s broader economic woes. The country has been caught in a cycle of monetary instability, policy inconsistencies, and a hostile business environment that continues to stifle growth.

While the government’s introduction of the ZiG currency was intended to restore stability, the rapid depreciation of the ZWG suggests that confidence in the new system remains low.

Businesses are still wary of holding local currency, preferring to transact in harder currencies like the US dollar, which has resulted in a dual-pricing system that further complicates operations.

Moreover, RBZ’s tightening of money supply and stringent reserve requirements has squeezed liquidity, making it difficult for firms to access funding for expansion and daily operations.

In turn, this has triggered a domino effect—business closures, job losses, and reduced industrial output, all of which are weighing heavily on the economy.

The sugar industry, once a pillar of Zimbabwe’s agricultural economy, now finds itself in a precarious position. Without urgent policy adjustments to foster stability, attract investment, and support business continuity, companies like Hippo Valley could see further deterioration in their financial health.

As Hippo Valley fights to stay afloat, the broader question remains: Will Zimbabwe’s policymakers finally embrace long-term economic stability, or will businesses continue to suffer under shifting goalposts?

For now, the company is bracing for more turbulence.

The success of Project Zambuko hinges on the government’s ability to restore macroeconomic stability, ease foreign currency shortages, and create a more predictable business environment. If these challenges persist, Zimbabwe risks further capital flight, shrinking corporate investments, and an economy unable to sustain its own industries.

With retrenchments looming, foreign currency woes deepening, and legal battles piling up, Hippo Valley’s predicament is a stark warning—Zimbabwe’s economic policies are not just theoretical debates; they have real, far-reaching consequences for jobs, investment, and industrial survival.