Treasury management, again!

Therefore, when pricing in Zimdollar one must look at the trends in order to come up with a fair price after considering the timelines for payment.

I AM back writing about treasury management for the umpteenth time. I have literally lost count of how many times I have written about this topic within the Zimbabwean context.

I have touched on every aspect, from the theory of treasury management to practical aspects in Zimbabwe. Using my own experiences and information I get to gather due to my unique role in the Zimbabwean economy where I have a bird’s eye view on several matters, I have provided what I feel are very practical views to help navigate the market.

Before I proceed, I want to repeat one of my favourite statements which I have used before — revenue is vanity, profit is sanity and cash flow is reality.

This speaks to the importance of cash flows. I first heard this statement from a senior chartered accountant, who said to me that he read it somewhere, likely from Greg Savage.

More than just being reality, cash flow has immediate effects on going concern. The inability to surf the waves of the Zimbabwean macro-economic environment may see an organisation getting overrun, drowning, and thus folding.

Whoever is responsible for treasury management, therefore, must be extremely vigilant.

Most managers responsible for treasury management, that I know, as well as the general public are used to depreciation of the local currency.

However, we have seen something I consider unprecedented — a strengthening of the Zimbabwe dollar (ZW$). To put that into context, when looking particularly at the recent past few weeks, it means that anyone holding Zimdollar has gained value compared to someone, who has been sitting on US dollar balances.

I never thought I would ever see such a scenario. The shock I am going through, which I believe most finance professionals are also experiencing, is what has prompted me to come back to this topic.

The trend

The graphical presentation accompanying this article depicts the movement of the  Zimdollar against the US dollar in the past couple of weeks. The strengthening of the  Zimdolar came soon after a rapid depreciation.

From around May and June 2023, there was some relative stability, and please note the adjective “relative”.

Seemingly, out of nowhere the  Zimdollar started to slide against major currencies and this put everyone into a panicked frenzy. Just as quickly as the depreciation commenced, the strengthening has begun as well.

The see-saw will result in causalities and beneficiaries depending on the positions that the business would have taken.

In my last article I advised caution and the need to remain level headed in-spite of the seeming collapse of the  Zimdollar. The feedback from some readers concerning the need to take a step-back in order to help restore calm in the market was positive, though with some scepticism, which frankly speaking is understandable.

Is this sustainable?

Naturally, the next set of questions includes:

How has this been achieved?

How long is this going to last?

Where will the rate finally settle at?

What happens after 23 August 2023?

These are the questions that will be giving the CFO, CEO and board members sleepless nights. I spoke about surfing the waves as opposed to letting them drown you, so business leaders are scrambling to protect their businesses, because the expectation was the rate would continue to slide so entities took certain positions that are no longer favourable.

Admittedly, some experts did advise the market to expect some strengthening, but I cannot help but excuse anyone who did not take heed of that advice.

Nonetheless, we find ourselves here and the answer to the above questions will help in making decisions in the current moment:

The government has been mopping up excess liquidity for a while now and this has resulted in the Zimdollar being very scarce. Furthermore, the measures instituted by the Ministry of Finance and Economic Development, to strengthen the Zimdollar and increase its demand for example payment of some major obligations in local currency have made an impact. The basic demand and supply principles then apply.

With regards to how long this will last, it is anyone’s guess, but I feel like the position taken that the Zimdollar must be propped up will only see further measures to ensure that our local currency does not depreciate. The obvious end game would be a stable exchange rate, so my expectation is, if or when equilibrium is reached the rate should settle at a point and we can escape this roller coaster.

This above point brings me to the question of where we will settle. My simplistic view is, it does not matter much if there is stability. All that is required is the agility to survive as a business during what I feel is a storming phase before we enter a norming. phase.

And finally, the big question is what the landscape will look like after elections on August 23. This again is anyone’s guess. My hope is that economic policies are not crafted to suit a single event like elections. As huge and impactful as elections are, policy should be informed by the situation obtaining within the market rather than the elections themselves. It is therefore my hope that whatever happens after elections should be a function of the economic environment. Admittedly, the elections will impact the economy, but they cannot be the sole factor upon which policy is made. I therefore chose not to worry about the 24th of August 2023 going forward but I suggest that one would rather review the past policy pronouncements and the current news to get a sense of the government’s position. 

Immediate reactions

With all this excitement, businesses need to respond. Therefore, when pricing in Zimdollar one must look at the trends in order to come up with a fair price after considering the timelines for payment.

Naturally any likely depreciation from date of invoicing to date of payment would be considered.

However, the question now is, do we expect a further strengthening and how does one price? Prudence will dictate that the supplier would rather use the prevailing rate and any gains emanating from a strengthening Zimdollar will accrue to them.

Conversely, the customer will be equally weary of the same, therefore, negotiating skills will come in handy. As per my previous article the symbiosis that exists between customers and suppliers is a key factor during negotiations and resolutions must protect both businesses.

Another scenario is in the retail space where we have already seen prices starting to come down.

Given that for comfort, most entities and individuals would want to see their margins in US dollar, there will be no prejudice if prices come down commensurately to the reduction of both the official and parallel rates.

In fact, failure to respond will reduce the competitiveness of formal businesses that operate in Zimdollars and US dollars.

Concluding thoughts

Failure to manage cash flows in this very volatile environment can result in an organisation failing to remain afloat.

The reduction in the rate presents opportunities for the agile business leaders (as does every crisis). Decision-making must be made more efficient to allow response to the market dynamics while of course avoiding a compromise in the quality of the decisions.

Every business leader needs to keep a keen eye on developments and continuously strategise to adapt to the changes.

  • Mavengere is the technical director at the Institute of Chartered Accountants of Zimbabwe (ICAZ), which is the largest and longest standing PAO in Zimbabwe.—  [email protected] or Twitter: @OwenMavengere.


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