Dramatic local currency fall set to trigger another round of price increases
The dramatic fall of the Zimbabwean dollar which is now 20 times less than the US dollar, since the 1:1 peg was removed, is a story that has been making headlines of late, but the carnage that it is causing across board is a story that is yet to fully unfold.
The rate had been stable around ZWL$10 for every US$1 but the beginning of September saw the local currency lose 50% of its value in less than 2 weeks.
The tumbling rate will have a negative effect on most companies’ profitability, if not their going concern status.
It’s a risk and cost companies cannot take hence the increase in prices for most goods and services.
Retail prices continue to shoot with the cost of bread now at ZWL$9,50 while a kg of lower grade meat is close to ZWL$30.
According to Zimstat, the month-on-month inflation for August stood at 18,06% putting most products beyond the reach of many households.
On Sunday 10th of September 2019 ZERA increased the price of diesel by 17c from ZWL$10.25 per litre to ZWL$10.42 per litre directly affecting the running costs of most companies who are now reliant on alternative source of power such as generators to keep their businesses in operation due to the current power crisis. More fuel prices increases are forecast given the unstable exchange rate.
Companies that have offices and operations in residential areas, are struggling to keep up with costs of doing business.
Power cuts are going on for 16 hours up to 20 hours and as a result companies are forced to use expensive generators.
Telecom companies are not spared either and might soon put up tariffs.
Most of their base stations are in residential and remote areas, likely to be affected by power cuts and the cost of powering those base stations using expensive generators is punitive. Only an economic tariff will make calls go through, not forgetting mobile money transactions.
It’s the same in pharmaceutical industry where prices are pegged in USD. The ZWL$ equivalent is out of reach for most people.
Power utility ZESA says it has lost US$900 million because it is charging sub-economic tariffs.
“Our customers are paying in Zimbabwean dollars and this has seen us recording a loss of about US$900 million. I would say we have lost close to a billion dollars,” said the power utility’s representative, Michael Chigwedere while appearing before parliament’s portfolio committee on energy and power development.
The power utility is also set for even higher losses as its international debts accumulated during the multicurrency era are still to be serviced. These could amount to ZWL$4 billion, according to Chigwedere.
“We also have problems relating to the exchange rate itself because we have huge loans, more than US$600 million, so for reporting purposes there are finance costs attached to the loans. So each time there is a rate movement, we experience exchange losses.
“So as we speak, we have exchange losses of at least Z$4 billion. So the figures that we expect to see at the end of this year are quite horrendous,” said Chigwedere.
He said the rout can only be stemmed by reviewing power tariffs which despite being reviewed early August 2019 are still sub-economic or below the cost of production or procurement.