The graph below shows SADC’s VAT and corporate tax regimes

Harare- Zimbabwe’s largest company by market capitalisation, a beverages giant listed on the Zimbabwe Stock Exchange (ZSE), Delta Corporation says the future remains bleak due to an aggressive taxation system in a poor economic environment coupled with exchange rate distortions, inflationary pressures, a weak currency and recurrent electricity blackouts. However, the situation is likely to be tougher with the global recession looming. Zimbabwe registered a technical recession between 2019 and 2020 due to a record inflationary environment exacerbated by the COVID-19 pandemic. 

Despite having one of the worst economic fundamentals in SADC, if not Africa, Zimbabwe boasts one of the worst taxation regimes, coupled with political polarisation and reactionary fiscal and monetary policies to resuscitate a weaker currency, which is making the economic environment horrible for businesses to operate. Since the reintroduction of the Zimbabwe dollar in 2019, the currency faced extreme backlash from the market and to fight resistance, government has employed aggressive economic policies. 

Delta expressed this in its trading update for the third quarter to full year ending 2023. Delta recorded growth across all its key segments. Revenue grew to 44% with a significant increase of local foreign currency sales at 70% as growth was registered across all sectors. 

However, the Group said, “The financial outturn in F23 could be affected by the foreign currency tax assessments arising from differences in interpretation of legislation on the currency of payment of certain taxes.”

The graph below shows Delta’s 3rd quarter performance and cumulative 9 months for full year 2023

There have been significant currency changes in Zimbabwe since 2018. These changes create some uncertainties in the treatment of transactions for taxes due to the absence of clear guidelines and transitional measures. Of significance are the exchange losses recorded on the change of the functional currency in terms of SI33/19.

Besides, there are various taxation systems with various taxing mechanisms which are believed to be unfair by many lobby groups, the Confederation of Zimbabwe Industries being one of them. Some taxes are payable only in US dollars in a US scarce economy, others in RTGS which are very few though while other taxes are payable in both currencies and using minerals as well.

Exporting companies are further subject to 60:40% export retention thresholds where 40% is relinquished to the RBZ in return for the local currency at the latest interbank rate. Despite having one of the most fragile economies in SADC, Zimbabwe’s corporate tax is high at circa 25% trailing behind more advanced economies like South Africa, Zambia, Namibia and Angola. 

With the introduction of RTGS currency in October 2018 which was confirmed as the sole transaction currency on 24 June 2019 without the support of fiscal measures as envisaged under the Transitional Stabilisation Plan, companies incurred huge monetary losses resulting in a recession. The economy has faced a multitude of headwinds which culminated in reduced consumer disposable income and weak business performance. The authorities responded with a myriad of fiscal and monetary policy refinements that in some cases fuelled the meltdown.

Between 2019 and 2022, Delta’s monetary loss increased by circa 2000% from ZWL358 million to ZWL7 billion in 2022. Between 2019 and 2022, the Zimbabwe dollar depreciated by 100% from trading at ZWL2.5 against the single greenback in 2019 to ZWL732 in 2022. Rapid Zimbabwe dollar depreciation has affected Delta’s performance, from losing ZWL2 billion in 2021 to ZWL7 billion in 2022. 

Since the introduction of the Zimbabwe dollar in 2019, various taxation systems have been employed by government on corporates to anchor its US dollar coffers and stabilise the local currency which, however, is still unfounded. 

The graph below shows SADC’s taxation mechanisms, VAT and CIT

Zimbabwe is one of the countries in SADC with the least GDP ranked among the poorest countries like Malawi.

This means productivity is never convincing due to an aggressive tax system, power blackouts and political intolerance. In 2022, Econet Wireless bemoaned an unrealistic IMMT tax where it lost millions of dollars. Zimbabwe has a 15% VAT, circa 25% corporate tax and an AIDS levy of 3%. Zimbabwe presently operates on a source-based tax system. This means that income from a source within, or deemed to be within, Zimbabwe will be subject to tax in Zimbabwe unless a specific exemption is available. The maximum rate was 30.9 % and the minimum was 24%. 

Elections fever

Meanwhile, in elections, Zimbabwe ones are known for being violent and lacking credibility from international monitors and opposition parties. Zimbabwe’s election periods are usually accompanied by fiscal indiscipline by the Central Bank through increasing ZWL liquidity in the market to fund government election programmes. Between June 2017 and June 2018 an election period, RBZ increased reserve money by 41% from US$6.5 billion to US$9.1 billion with a month-on-month increase of 6.84%. Resultantly, the nation went into recession in 2019 coupled with acute shortages of foreign currency to import key products such as fuel, bread and cooking oil. Consumer spending decreased significantly which heavily affected company performance. Between 2019 and 2020, Delta recorded one of the least revenue increases of 10%, from ZWL7.6 billion to ZWL8 billion. 

During this recession period, Delta Corporation survived by killing competition through mergers, diversification and acquisitions. 

Political intolerance and polarisation

Delta said political polarisation and intolerance are a concern for the group’s robust performance in future. Political intolerance especially for the opposition parties has become the main attraction of the international community. For companies to prosper, there is a need of resurrecting heavy industry and injecting more capital into the economy through FDIs and international corporations. However, due to political toxicity, selective application of law and corruption, Zimbabwe has been shunned by the international community resulting in a porous economy. Former President, Robert Mugabe has been blamed for human rights by the international community, particularly the West, leading to a decline in foreign direct investments. However, when President Mnangagwa came to power, he promised sanitisation of the whole political system which the United States, EU and the United Kingdom believe it is still unfounded. 

The Second Republic targeted to improve the image of the country, re-engage and engage the global community by improving the Good Country Index (GCI), Country Brand Ranking and improve Global Travel and Tourism, Competitiveness Ranking and Global Happiness Index. 

 However, the GCI faltered since 2019. The Good Country Index measures how much countries contribute to the planet, and to the human race, through employed policies and behaviours. Second Republic’s efforts fell short as the country got the worst performance by ranking, missing the 98th targeted position to score 111 in 2021, worse than the 2019 performance. On the Competitiveness ranking, the country also registered a failure by ranking 127 out of 140 instead of the targeted 114. The Global Competitiveness Index assesses the microeconomic and macroeconomic foundations of national competitiveness, which is defined as the set of institutions, policies, and factors that determine the level of productivity of a country.

The GHI for Zimbabwe was also off-route in 2021. The Happiness Index measures life satisfaction, the feeling of happiness in domains such as psychological well-being, health, time balance, community, social support, education, arts and culture, environment, governance, material well-being, and work and these are answered by the public. The GHI which targeted number 136 in 2021 out of 191 fell short to hit number 148. Of 

Of more importance was the flopping of the Country Risk Index which targeted to attain a grade CC in 2021 only to score Grade E which is the highest risk political and economic situation. The baseline target was grade CCC which is a high risk while the target was CC which is a medium risk. 

The CRI quantifies the risk of a shock such as an economic crisis or a sudden change in the political environment that would affect those conducting business within a country, territory, or special administrative region. 

As a result, Foreign Direct Investments fell drastically, from US$0.74 billion in 2018 to US$0.19 billion in 2020. This is the same year Delta Corporation recorded one of the least revenue growths. 

Meanwhile, power outages and water challenges courtesy of recurrent drought spells are major impacts that await Delta in 2023. Despite gaining independence in 1980, old dilapidated infrastructure from Smith’s era is still used by ZINWA, the water supply body and ZESA, the power utility. Relying on ZESA and ZINWA has become one of the worst nightmares for the Zimbabwean industry. Big firms like Delta, though in a different line of production such as Caledonia and Econet Wireless have long gone for solar and generators to deal with blackouts. Zimbabwe’s energy problem will not end overnight as it requires billions of investments in solar energy and coal to end the power crisis.

Will Delta survive the looming recession?

Amid, these political and economic uncertainties shunning investments in the country which are likely to increase in intensity in 2023 due to the upcoming elections, World Economic Forum has predicted a possible global economic recession in 2023. In Davos, the majority of the World Economic Forum’s Community of Chief Economists projected a global recession in 2023, see geopolitical tensions continuing to shape the global economy, and anticipate further monetary tightening. Almost two-thirds of chief economists believed a global recession is likely in 2023 of which 18% considered it extremely likely – more than twice as many as in the previous survey conducted in September 2022.

During recessions, companies respond differently. Ian preparation for the looming recession, Twitter, Amazon, Google and Tesla have laid down thousands of workers to cut expenditures. Meta, Alpha Media Holdings and Ariston Holdings also cut the number of employees during recession periods. However, they also used the economic meltdown opportunity to broaden their footprint and kill competition through mergers, acquisitions and automation of processes.

With Zimbabwe in recession in 2019 and a global recession in 220, Delta Corporation remained productive and profitable though profits declined in 2020 due to COVID-19 restrictions. Delta responded to the COVID-19 pandemic through hybrid operations and increased automation of processes. In this way, a few workforces with the help of machines ensured production kept moving. 

Delta further employed cost-cutting strategies to deal with production costs and expenditure, diversification and acquisitions as well as increasing borrowings to sustain productivity. 

Between 2018 and 2019, Delta’s finance charges plummeted by 258%, from ZWL5 million in 2018 to ZWL21 million in 2019, a year of recession. This means Delta borrowed more to sustain operations as its inventory increased from ZWL66 million to ZWL128 million in 2019. In 2020, finance charges further soared by 100%, from ZWL110 million to ZWL160 million in 2020 meaning the company did not cease extending its credit lines to sustain operations in a cash-stripped environment coupled with forex shortages and exchange rate disparities. To cement that, the results further show that Delta incurred less monetary loss during the recession than in other periods meaning it capitalised more on US dollar sales and US Dollar credit lines. 

Through the accumulation of loans and profits, Delta finalised the 100% acquisition of United National Breweries in April 2020 and increased its shareholding stake in Afdis to 50.1% in 2019, thus, increasing competitive advantage and economies of scale. UNB is the leading brewer of traditional beer and owns the Chibuku brand in South Africa. As a result, the company shelved a 19% increase in operating income and a 10% increase in revenue despite a 9% decrease in profit after tax. However, the liquidity ratio remained firm at 1.2 meaning the company was able to finance its obligations in a recession and move forward. In 2019, the liquidity ratio was firmer at 1.2 as well. With the acquisition of Schweppes Zimbabwe, Delta has killed the competition in the drinks and alcohol market by 86%. 

With increased automation, a monopoly in the beverages sector in Zimbabwe and diversified footprints beyond, Delta will not be heavily affected by either the looming recession or elections. 

However, the biggest challenge for Delta in 2023 will be Insscor Africa. With the venture of Insscor into the alcohol business in the wake of a projected recession, this is the biggest challenge for Delta. It is cognisant that many brands have failed to take on Delta but they lacked the capacity that Innscor currently holds. Ngoda traditional beer which was expected to challenge Delta in the opaque beer market when it launched in 2015 did little to dent Delta’s dominance while Ingwebu Breweries is also among the small players and it has been in existence for over a decade without any harm. 

 Insscor Africa Limited unveiled an opaque beer under the Nyathi brand last year after injecting US$7,5 million into the project with much anticipation as the beer is set to roll out this year. 

Innscor is arguably the largest food manufacturer in Zimbabwe and is quite possibly the only listed player that is more vertically integrated than Delta. The business’ reach in the food sector allows it a steady flow of raw materials for the opaque beer while its extensive distribution network could challenge the extent of Delta’s reach.

Further, Innscor’s management is strategic given it managed to survive the two recessions, in 2019 and 2020 through the group’s continued expansion in several of the country’s food manufacturing sub-sectors over the last six years despite the volatile macroeconomic environment. Given its planned capital expenditure of US$58 million in the coming years, Innscor is also the only player in the industry with enough skin in the game to match Delta’s capital expenditure. With its strong capital base, Innscor is one of the few entities that can absorb losses in its sorghum beer operations long enough until its market penetration strategy succeeds.

This is notwithstanding Delta’s competitive advantages that will dull Innscor’s possibility of dethroning the Chibuku brand’s strong market share which is a regional footprint, a strategic shareholder with market expertise and good taste.

Delta has operations in Zambia and South Africa, and both regional operations manufacture sorghum beer. This is a competitive advantage because the operational diversity adds to the economies of scale, reduces earnings volatility, and provides an additional source of foreign currency regardless of recent losses in its operations in Zambia and economic headwinds currently experienced in Zimbabwe.

To crown it, based on our analysis, Delta will neither be greatly affected by the looming recession nor elections fever. However, its main rival in the Chibuku domain is Insscor and it needs to play its cards wisely to continue having a greater market share.