CHIREDZI – Zimbabwean businesses, notably sugar producer Hippo Valley Estates Limited, continue to face significant financial and operational challenges due to the country’s dual currency system, with the company’s recent financial results highlighting how the coexistence of the new Zimbabwe Gold (ZWG) and the US dollar is straining cash flow, increasing costs, and impacting overall profitability despite strong production.
The ZWG, introduced on April 5, 2024, was envisioned as a solution to curb inflation and reduce reliance on the US dollar. While initially stable, the ZWG began weakening in late September 2024, closing the financial year at ZWG28.1:US$1.
This volatility, coupled with the continued prevalence of the US dollar, has created a challenging operational environment for companies.
The company noted that despite a tight monetary policy supporting some exchange rate stability in the latter half of the year, liquidity in the formal sector deteriorated significantly.
A key concern for the company is the difficulty in utilising significant ZWG cash holdings, as the majority of suppliers demand settlement in US dollars.
“Dual currency trading created imbalances, with significant ZWG cash holdings proving difficult to utilise, as most suppliers required settlement in US$, a currency the Company was unable to generate in sufficient quantities through normal trade,” the company noted.
Further compounding the issue is the reduction in the foreign currency retention threshold from 75% to 70% towards the year-end.
This move is expected to further curtail the company’s US dollar export inflows in the coming year, directly impacting its ability to fund essential raw material imports and crucial capital expenditure.
The dual currency system and underlying economic distortions have directly impacted the company’s cost structure.
While overall sales volumes for Hippo Valley Estates decreased marginally by 3%, revenue grew by 7%, primarily driven by a strong recovery in the local market, which generated higher returns.
The company deliberately prioritised the local market, leading to a 60% decrease in export market volumes, as local sales offered stronger average price realizations.
The sugar industry was also negatively affected by changes in the Value Added Tax (VAT) category, with sugar moving from a zero-rated supply to an exempt supply. This change alone impacted the business to the tune of US$7 million in unclaimable VAT in the current year.
The Intermediary Money Transaction Tax (IMTT) for US$-denominated transactions also doubled from 1% to 2%, further increasing the cost of doing business.
Despite these significant financial headwinds, Hippo Valley Estates demonstrated strong operational performance.
The Agriculture division delivered its strongest performance to date, with cane supplied from the company’s own estates (“Miller-Cum-Planter”) exceeding one million tons, an 18% increase from the prior year.
The Milling division also saw a 13% increase in sugar production, reflecting improved plant uptime and processing efficiency.
The reinstatement of import duty on sugar, following the revocation of Statutory Instrument (SI) 80 of May 2023, played a crucial role in the recovery of the Huletts sugar brand’s local market share, which was sustained above 86% during the reporting period.
This led to a 19% increase in demand for Huletts brown sugar compared to the prior year.
However, the benefits of this operational success were largely offset by the high cost of doing business, primarily driven by the costs of cane and manpower.
While operating profit significantly improved , the overall profit for the year declined by 45%.
“Operating profit improved significantly to US$7.9 million (2024: loss of US$57.8 million), reflecting the reversal of prior year CPI and currency effects embedded in cost of sales, the movement in the fair value of biological assets and administration expenses, before these transactions and balances were translated to US$.
“Despite this improvement, profit for the year declined by 45% to US$13.4 million (2024: US$24.3 million), mainly due to the inclusion of a non-monetary gain in the prior year relating to the hyperinflationary restatement process,” the company noted.
The shift by private farmers from the Cane Milling Agreement (CMA) to the Cane Purchase Agreement (CPA) has also significantly strained liquidity.
Under the CPA, the company is required to pay for cane upon delivery, creating a timing mismatch where cash outflows are concentrated between April and December, while revenue is recognised throughout the year.
The company’s borrowing facilities have not yet been adjusted to reflect this change, leading to pressure on its working capital.
As a result of ongoing liquidity demands, elevated cost pressures, and broader macroeconomic uncertainty, the Directors have resolved not to declare a dividend for the year ended 31 March 2025.
This decision prioritises financial stability and will be reviewed once the company’s funding structure and cash flow generation are better aligned with its capital and operational requirements.
The Zimbabwe Stock Exchange listed company said it remains focused on increasing sugar production, expanding its revenue portfolio, containing costs, and generating positive cash flows.
However, significant challenges persist in the form of water availability, electricity supply interruptions, and the persistent complexities of the dual currency operating environment.
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