• Sales Decline: 8% drop with turnover decreasing to US$8.57 million in the 1HY2024
• Revenue and Loss: Revenue declined to US$8.57 million from US$10.48 million and a  loss of US$72k 
• Pessimistic Outlook: The company anticipates ongoing difficulties but expects savings from a newly commissioned solar plant, which will reduce electricity costs

Harare- Proplastics, a leading manufacturer of PVC piping and fittings, has reported a significant decline in export sales, from 15% of total sales in 2023 to a mere 1% in the first half of 2024 primarily due to the 25% foreign currency surrender policy and limited access to foreign currency on the formal market.

However, it's essential to note that the policy has been in place since 2023, and Proplastics' export sales remained relatively resilient until now.

This suggests a cumulative impact of the policy, compounded by other challenges including the shift of economic activities from formal to informal market.

The 25% surrender policy requires Proplastics to relinquish a quarter of its foreign exchange earnings, severely limiting the company's ability to reinvest in export-oriented activities. 

On the other hand,  the scarcity of foreign currency hinders Proplastics' capacity to import essential raw materials, pay international suppliers, and meet export commitments.

These challenges have resulted in a competitive disadvantage for Proplastics, increasing production costs and making its products less attractive in international markets.

The uncertainty surrounding foreign currency availability and the surrender policy's impact on cash flows has led Proplastics to adopt a risk-averse approach, scaling back export operations and focusing on domestic sales instead.

However in the local market, the company also experienced a contraction in sales volumes, down 8% year-over-year (YoY), primarily attributable to sluggish market demand for its product offerings, resulting in reduced offtake and subsequently impacting top-line performance.

“Trading during the first half of the year was characterized by exchange rate volatility, severe power outages, and depreciation of the local currency, delays in fiscal policy pronouncements, and the adverse effects of the El Niño-induced drought.

“Major projects were stalled, and some were reduced in size as the market struggled with liquidity,” stated the group’s chairperson, Gregory Serbbon, in a statement accompanying the half-year financials.

The local sales slump redirects attention from forex and surrender policy challenges from the company's struggles to a more fundamental issue: Zimbabwe's economy is undergoing a profound transformation, driven by the rapid expansion of the informal sector.

As consumers adapt to the changing environment, traditional companies like Proplastics must learn to evolve and reconfigure their strategies to remain relevant.

In informal market, prices are significantly cheaper, with many producers offering similar products to Proplastics.

Beyond forex and surrender policy considerations, Proplastics must also focus on strategic adjustments to stay competitive in a rapidly changing economic environment, where informal markets are increasingly influential.

This requires embracing informal market dynamics, developing flexible business models, enhancing operational efficiency, diversifying product offerings, and leveraging technology to reach new customers to remain competitive and relevant in the emerging economy.

Meanwhile, the 25% foreign currency surrender policy has a significant repercussions for Proplastics,

This requirement directly impacts the company's financial viability by reducing the amount of foreign currency available for reinvestment and operational expenses.

In return, Proplastics receives the equivalent of 25% of its earnings in local currency. However, this local currency has depreciated significantly, losing nearly 50% of its value against the US dollar.

This depreciation creates further complications as many suppliers index their prices in US dollars, viewing it as a safer option.

This practice exacerbates the challenges as the company must navigate a landscape where its costs are increasingly denominated in a stronger currency, while its revenue in local currency diminishes in value.

The financial returns from exporting are diminished not only by the surrender policy but also by the volatility of the local currency.

Consequently, the company may choose to focus on the domestic market, where the risks are more manageable, rather than investing in the complexities of international trade.

This shift however, hinders growth potential and reduce competitiveness in the global market, ultimately impacting the broader economy that relies on export-driven growth.

These issues create an environment where the incentives for exporting are severely diminished, potentially stifling growth and innovation within the company and the industry as a whole.

The government reduced surrender portions from 40% to 25% 2023 in a bid to ease pressure on companies. These surrender portions are intended to sprovide foreign currency to businesses.

However, companies and the CZI have been advocating for the complete removal of the surrender requirement to enhance their competitiveness in international markets and support their capital projects, or at least a reduction to 10-15%.

Nevertheless, the government has insisted that the current requirement will remain in place.

In the months following the introduction of the Zimbabwe Gold (ZWG/ZiG), the government injected US$190 million into the forex market to support the deteriorating ZiG, which was sourced from the 25% surrender portions, making them a fundamental pillar in the country’s economic framework.

During the period under review as a result of sales slump, the business reported a loss of US$72,000.

The gearing ratio increased to 5%.

Despite a challenging outlook, the completion of a solar plant is expected to generate approximately 50,000 kWh of energy monthly, leading to savings on electricity and fuel costs.

This development may positively impact the second half of the year, with raw material prices anticipated to remain stable. 

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