SEED CO says its profit margins have been dampened by the growing gap between the official and parallel market exchange rates.
This comes as a number of businesses, including RioZim and Ariston Holdings (Ariston), have suffered the same fate due to the country’s currency disparities and “harsh” exchange controls.
The Reserve Bank of Zimbabwe’s auction system closed for the holidays a fortnight ago with the rate at US$ 1:108,7 ZW$ — a discount of between 80 to 100 percent relative to rates on the grey market.
“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,” Seed Co said in its results for the half-year to September 30, 2021.
“This mismatch is now further compounded by the increase in finance costs following the policy rate hike from 40 percent to 60 percent by the Reserve Bank of Zimbabwe (RBZ) announced on October 28, 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,” the company said.
Ariston reported in December that its profit margins declined significantly during the year ended September 30, 2021 due to exchange losses arising from the RBZ’s exchange controls.
The agriculture and horticulture company said its profits from operations declined to 11 percent of revenue compared to 21 percent of revenue experienced in the prior year comparative period due to the impact of the mismatch, arising from revenue from exports, where RBZ retention at 40 percent is being paid at a rate significantly lower than that being charged by suppliers, “resulting in erosion of value”.
“In the year under review, approximately 20 percent was lost from the revenue line as a result of the 40 percent RBZ retention,” chairman Alexander Jongwe said in a statement accompanying the company’s results.