Rising inflation bites companies

…As suppliers cancel contracts

August 4, 2022

LIVINGSTONE MARUFU

 

Rising inflation is ravaging an already ailing Zimbabwe economy amid revelations suppliers are cancelling contracts with companies paying for goods and raw materials in local currency, Business Times can report.

Captains of industry said this week that suppliers preferred the United States dollar as the Zimbabwe dollar continues to weaken against all major currencies.

Zimbabwe’s annual inflation raced to 256.9% in July 2022, from 191.6% in June, as the local currency continues to weaken rapidly against all major currencies.

The rampant inflation is also imposing severe financial pressures on workers as prices of goods are shooting over the roof.

The Zimbabwe National Chamber of Commerce president Mike Kamungeremu told Business Times that when inflation goes up, it becomes very difficult, from a practical perspective, for businesses with contracts that were signed using old prices.

“What it means is that they have been eroded.  Some contracts need to be renegotiated. The fact that some have gone through long tender processes may be required to be cancelled. We may be asked to retender or risk being blacklisted by suppliers,” he said. Kamungeremu also said there was serious pressure from workers who are demanding upward reviews on salaries and some demanding to be paid in United States dollars.

“There is no landlord who is not asking for US$ for rent, no wonder why workers are insisting on US dollars,” he said.

Kamungeremu said businesses get 80% of their topline in local currency as the law compels them to do so.

He said resources such as fuel and raw materials require strictly US dollars and it is creating a huge problem for business.

“Every day we are in negotiation with workers, suppliers and customers. We are participating on the auction platform. (But then), if you apply for US$100 000, you get US$50 000. The Zimbabwe dollars in the account are being eroded,” Kamungeremu said.

Other analysts said rising inflation was posing a threat to companies amid growing fears most will struggle to restock, which could potentially trigger a significant reduction in production and low capacity utilisation.

Confederation of Zimbabwe Industries president Kurai Matsheza said the inflationary pressures are worrisome to the business.

“If you have a contract with some suppliers this means they have to cancel it or give it to you after those dealers with US$ as they now prefer hard currency which stores value,” Matsheza said, adding an inflationary environment is bad for business as production continues to shrink due to the volatile landscape.

“A shrinking economy impoverishes the populace and has negative effects on everyone.”

The captains of industry said companies were distressed and feared capacity utilisation will drop.

Failure to operate a true Dutch auction system, the industry leaders said, was one of the biggest problems, resulting in an unsustainable backlog.

The local currency has continued to weaken against the major currencies, especially the greenback.

This week, the Zimbabwe dollar was trading at ZWL$900: US$1 on the parallel market.

At the auction system, the local currency was trading at ZWL$416.20:US$1 and ZWL$458:US$1 at the interbank market.

The central bank believes its tight monetary thrust will be buttressed by a favourable uptake of the gold coins which will help in mopping excess local currency balances.

Since the introduction of the coins last week, 1500 were sold forcing the central bank to release a second batch of 2000 gold coins. Monetary authorities say individuals and companies with excess local currency balances were flooding the parallel market leading to the routing of the Zimbabwe dollar.

The government is now paying contractors half in foreign currency. Contractors were also blamed for fuelling the parallel market activities.

 

 

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