BY SHAME MAKOSHORI
THE Reserve Bank of Zimbabwe (RBZ)’s October 28 decision to hike it’s policy rate will exert fresh pressures on an industry that is already struggling to navigate through spiralling overheads, the country’s biggest seed breeder said Friday, warning of sharper finance cost increases ahead.
Finance costs are the interests that banks charge companies when they borrow to fund operations.
The central bank’s monetary policy committee hiked the policy rate to 60% in October after keeping it at 40% most of this year.
The Zimbabwe Stock Exchange-listed Seed Co Limited, which reported financial results for the half year ended September 30, 2021, raised the red flag after inflation adjusted finance costs charged to $318 million during the period.
This figure was at $161 million during the comparable period in 2020, and became one of the driving factors behind Seed Co’s surprise $1,9 billion loss during the review period.
But Seed Co executives had reason to worry.
Most of the finance cost increases took place before the RBZ hiked the rate under a plan to keep money supply under strict check in order to contain rampaging inflation, which has extensively battered the domestic currency.
In a commentary to the financial results, Seed Co chief executive officer (CEO), Morgan Nzwere said the policy rate hike, combined ongoing volatilities on the currency front, would remain the biggest drawback to operations.
“The significant disparity between the official exchange rate which is the benchmark of the company’s selling prices and the parallel exchange rate which is the benchmark of most of the company’s operating costs, including the cost of raw seed from growers, has put significant stress on margins and business model viability,” Nzwere said.
“This mismatch is now further compounded by the increase in finance costs following the policy rate hike from 40% to 60% by the Reserve Bank of Zimbabwe announced on 28 October 2021. Whilst the board and management are alive to the structural challenges, there is little headroom to invoke strategies to mitigate the adverse impact of these largely exogenous economic headwinds. Nevertheless, the company continues striving to preserve the balance sheet, through among other things, tangible capital expenditure and price adjustments to the extent possible, in anticipation of an improvement in the operating environment,” the Seed Co CEO said.
In the past few months, the domestic currency has depreciated at a high pace on the stubborn black market, falling to US$1: $210, after trading at US$1: $120 during most of the first half of 2021.
Pessimists have projected that the unit might plummet to US$1:ZW$225 this festive season, as demand for foreign currency mounts ahead of the 2022 first term.
This would be bad news for industries, which have struggled to access cheaper United States dollars from the foreign currency auction system most of the year.
Seed Co’s inflation adjust revenue advanced to $2,1 billion during the review period, from $1,4 billion during the comparable period in 2020.
However, the firm slipped to a $1,9 billion loss during the review period, from $3,1 billion profit during the comparable period in 2020, mostly underpinned by currency volatilities, high inflation and the finance costs.
Nzwere said inspite of the headwinds, Seed Co had sufficient seed stocks to meet demand during the 2021/2022 farming season.
“The group’s field seed stock quantities delivered by growers were negatively affected by unfavourable weather at the tail end of the production season. In addition, most vegetable seed’s supply chain was disrupted by Covid-19 related logistical constraints. In-spite of these challenges, the group has sufficient stock to satisfy projected demand,” he said.