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Granting credit to Zim companies needs review as Dollar trades against itself

A number of SA companies are extending credit facilities to Zimbabwean debtors, and some of our local trade credit insurers are covering these risks. Considering recent developments in Zimbabwe it may be time to review these credit opinions, especially in light of the fact that the country is the only place in the world where a currency trades against itself. The price of a US Dollar in Zimbabwe? About $1.07!

According to an article published in the Business Day, which was based on a report published by Bloomberg; it would seem that banks and currency dealers have done their best to avoid new exchange control regulations introduced by the Reserve Bank of Zimbabwe in May. Bloomberg has revealed that the bank has now issued a directive to banks and other authorised foreign currency dealers, requiring that half of all proceeds from the sale of platinum, ferrochrome and other minerals be transferred to the central bank’s offshore account.

This directive is in line with an announcement made by the central bank on May 5 that it would convert 40% of all bank deposits resulting from exports to rand, and a further 10% to euros, in a bid to restore “balance” to the multicurrency basket and ease a chronic dollar shortage in the country.

According to the report, the regulator will transfer the equivalent amount into the authorised dealer’s account for the exporter, while an “incentive” equal to 5% of the proceeds will be credited to another account set up on behalf of the exporting company. This was billed as an “incentive payment” aimed at “encouraging companies to export their products”.

In reality, it is an attempt to get banks and currency dealers to abide by new exchange-control regulations that force exporters to accept payment in rand and euros. I say this because the bank followed up its directive with a warning that it would cancel the licences of banks and foreign-currency dealers if they violated the new regulations. From what I can ascertain, there was no mention of the 5% sweetener when the regulations were first announced.

This announcement was first made in May along with a host of measures including the introduction of bond notes, which are intended to boost liquidity. These will supposedly be equal in value to the dollar and backed by a $200m loan facility from the Cairo-based African Export Import Bank.

Since 2005, Zimbabwe’s trade deficit has widened from an average of $400m to $2.5bn. In 2015, the country imported $5.5bn of goods, but only exported $2.5bn. The result of running such a large trade deficit for so many years is that the country is running out of paper money. A bad situation has been made worse by falling commodity prices, weather conditions and infrastructural hurdles such as disruptions to the supply of water and electricity, which have all but put an end to the manufacturing sector. This liquidity crisis has been worsened by the rand’s depreciation against the dollar.

The country is so short of foreign currency that the central bank also introduced regulations that triage who the banks are allowed to make foreign currency payments to. Top of the list are imports of goods such as basic foodstuffs and medicines, fuel and agrichemicals. Next in line are those the government deems to be involved in the productive sector, such as mining and manufacturing. Other payments such as capital remittances from the sale of local property or payment of foreign universities are categorised as nonpriority items and are unlikely to get approval.

As Confederation of Zimbabwe Industries president Busisa Moyo has pointed out, the new notes might relieve the cash shortage, but they won’t address the cause of the crisis, which is that the collapse of the economy means the country imports the bulk of what it consumes and produces precious little for export. The unavoidable truth is that Zimbabwe needs to generate foreign currency and forcing exporters to take a 50% haircut, even if you then offer them a 5% “incentive”, isn’t going to do it.