RBZ splurges US$1.2bn financial instruments on legacy deb

PHILLIMON MHLANGA

Zimbabwe’s central bank will this month issue financial instruments worth about US$1.2bn to local companies to cover for unsettled foreign exchange liabilities to allow firms to balance their books, Business Times can report. Reserve Bank of Zimbabwe (RBZ) governor John Mangudya said this week that the apex bank will then next year make arrangements to liquidate the heavy, toxic unsettled foreign debt burden on behalf of the troubled local companies.

The viability of several companies has been under serious threat as a result of legacy debts, denominated in foreign currency following far-reaching currency reforms by the government in June this year. The debt burden has spooked business and companies, which are now finding it difficult to borrow from offshore creditors and financiers. Most lenders across the world have now become risk averse when dealing with Zimbabwean companies.

 Mangudya said the financial instruments to be issued this month include savings bonds, and will only apply to those companies that registered their legacy debts to foreign creditors with the RBZ. The debts have continued to weaken companies’ balance sheets and remain a deterrent to firms’ chances of courting foreign investors. Most investors demand clean balance sheets before extending the much needed fresh international capital. “What we are going to do for companies is that we are going to provide instruments that include savings bonds so that they can balance their books of accounts,” Mangudya told Business Times.

“This will be like an I owe you (IOU) some money voucher, which they will hold on to. This is work in progress but before the end of the year, companies will have these instruments so that they can balance their books.”

Mangudya said the bank has been discussing the matter with the Public Accountants and Auditors Board which regulates the accounting profession in Zimbabwe and the Institute of Chartered Accountants of Zimbabwe. He said the parties have “reached an agreement that we issue these financial instruments before the end of the year”.

In his Monetary Policy Statement issued in September, Mangudya introduced US$-denominated Savings Bonds to promote a savings culture and to provide reasonable return on FCA Nostro account deposits and US$D cash held by individuals and firms. The US$-denominated Savings Bonds have interest rate of 7.5% per year, have minimum tenure of one year, enjoys tax exemption in line with government policy, have liquid asset status, are tradable and accepted as collateral for overnight accommodation by the RBZ.

The introduction of financial instruments to cover unsettled foreign liabilities comes as business executives have been finding it difficult to continue getting supply of critical raw materials on credit, because offshore suppliers were now demanding pre-payments until the legacy debts have been settled.

Most half year financial results for local companies, published recently, show that delays in settling foreign obligations were weighing down the operations of companies that have lodged their applications for relief with the central bank. This has seen companies with significant foreign debts sinking deeper into dire straits due to currency volatility and exchange rate fluctuations, with their balance sheets being increasingly eroded and foreign currency liabilities ballooning.

This has left most of the companies technically insolvent and on the brink of bankruptcy. The RBZ, in July this year directed companies to transfer balances at 1:1 to the apex bank, as it makes plans to pay foreign creditors on behalf of the local companies. Following the declaration of the Zimbabwe dollar as the sole legal tender through Statutory Instrument 142 in June, which effectively outlawed the use of the United States dollar and other external currencies, some companies have suffered exchange losses mainly arising from their foreign obligations.

There are, however, fears that the central bank will struggle to honour the commitment given that the country has been reeling from foreign currency challenges, over a period of time, liquidity crunch and cash crisis. Companies are now desperate to offload their debts. The move by the central bank to direct companies to off-load the long standing debts, which continue to hinder industry’s recovery, to the central bank came after the monetary authorities liberalised the foreign currency market and introduced an interbank market in February this year, with the exchange rate moving from the ZWL$1: US$1 parity against the United States dollar to ZWL$16: US$1 this week.

Unsettled foreign obligation has seen suppliers of raw materials stopping suppliers ordering local firms to prepay for the raw materials. They are, however, finding it difficult to access foreign currency at the formal interbank market, which the central bank said was being abused by some banks.

The central bank now wants to revamp the current interbank market, benchmarked to the Reuters system. Failure to access foreign currency from the official interbank market has resulted in local firms turning to the black market, where rates are in the range of ZWL$22: US$1 this week. The situation has left companies with huge financial burden on their books. Government has banned the use of foreign currencies and introduced a mono-currency –the Zimbabwe dollar-which is now the sole legal tender.

Now, the RBZ wants to pay the legacy debts on behalf of local companies at 1:1. The blocked funds have been choking local firms and the delay in settling these local firms continues to negatively affect companies’ balance sheets making it difficult for companies to court foreign suitors, who demand clean balance sheets before injecting fresh international capital.

The RBZ, however, which purportedly assumed the debts, and promised to pay the debts on behalf of the local companies, has been taking long to settle these debts, companies said. Local firms have been finding talks with the RBZ and government tough as they try to navigate a way out of a long distress.