- Mass Retrenchment: Has initiated a strategic phased retrenchment program to alleviate rising operational expenditures
- Government Policies in Question: Including allowing duty-free sugar imports, change in VAT status, currency carnage
- Formal Sector Under Threat: Is a symptom of a broader crisis facing Zimbabwe's formal sector, which is struggling to compete with cheap imports and informal traders
Harare- Triangle Limited, a leading sugar manufacturer in Zimbabwe, has embarked on a strategic phased retrenchment initiative aimed at alleviating rising operational expenditures and reinstating profitability. The organization has been contending with a substantial erosion of profit margins, which have deteriorated by 55% since 2022, while personnel costs have escalated by 133% relative to revenue. Additionally, the company's debt levels have reached a critical threshold, and it has been unable to generate positive cash flows from its operational activities for the past three years.
The imperative to reduce workforce numbers stems from the necessity to safeguard the organization's long-term viability and ensure its ongoing contribution to Zimbabwe’s economic framework and the welfare of communities in the Lowveld region. While the company has made progress in reversing the downward trajectory of sugar production, the cost structure associated with sugar manufacturing remains significantly above regional averages, rendering it economically unfeasible.
Key drivers behind the company's operational challenges encompass surging operational expenses, particularly in critical areas such as fertilizers, fuel, maintenance, and imported goods/services, compounded by inflationary pressures and currency devaluation. A notable impediment is the inability to reclaim VAT on inputs following the exemption of sugar from VAT, alongside intensified competition from low-cost, duty-free imported sugar, which has severely undermined the company's capacity to maintain its current operational levels.
To contextualize Triangle Limited's operational hurdles, it is crucial to assess the company's profile. As a wholly-owned subsidiary of the Tongaat Hulett Group, a premier agri-processing entity in Southern Africa, Triangle operates within the southeast Lowveld of Zimbabwe. It stands as the largest sugar producer in the nation, with a crushing capacity exceeding 3.5 million tons of sugarcane annually. In addition to its sugar production capabilities, Triangle Limited also manufactures over 30 million liters of ethanol per year.
Smuggling Pandemic
The proliferation of smuggled, substandard sugar has further intensified the company's operational difficulties. Zimbabwe's porous border system has facilitated the influx of smuggled goods, including sugar, which has significantly disrupted local enterprises. The government's lack of decisive action to mitigate this issue has exacerbated the challenges faced by formal businesses, including Triangle Limited. These unauthorized goods, typically produced in regions with stable currencies and conducive policies, are marketed at substantially lower prices, creating formidable barriers for local products to compete effectively.
Zimplow has encountered a significant influx of substandard Chinese trucks in 2024, priced at approximately half of Zimplow's retail cost. Despite the inferior quality of these vehicles and competing products, the prevailing economic conditions in Zimbabwe have resulted in a market where price takes precedence over quality. This situation is further exacerbated in the apparel sector, where a US$200 suit at Edgars can be sourced for as little as US$30 in informal tuckshops known as 'RUNNERS.' Similar trends are observed in food retailing, prompting an exodus of businesses from the market between 2024 and 2025, with remaining firms consolidating operations and reducing branch networks to maintain a lean operational structure.
Government intervention has formalized the influx of cheap imported goods through various statutory instruments. In the sugar sector, the repeal of Statutory Instrument 80 of 2023 facilitated duty-free sugar imports, intensifying market volatility. This policy shift has led to a surge in imports, adversely affecting domestic sales and creating uncertainty for local producers such as Hippo Valley and Triangle Limited. As a result, the competitive landscape has become increasingly challenging, with over 16 brands of low-cost imported sugar entering the market in 2024. Despite the government's reversal of this policy later in the year, the detrimental effects are still being felt.
Formal enterprises play a critical role in job creation, with large-scale retailers employing up to 20,000 individuals nationwide, making them the second-largest employer after the government. Hippo Valley, as a prominent player, employs approximately 16,000 workers, ranking as the largest single employer, second only to government. The constriction of these companies not only jeopardizes the employment framework of the nation but also diminishes government revenue, as their closures lead to a decrease in tax collections.
The informal sector is ill-equipped to compensate for these losses, reflecting the government's need to address the challenges posed by a predominantly informal market. Basic economic principles indicate the adverse effects of informalization on Zimbabwe's economy. In its 2025 budget presentation, the government has included the informal market in the tax base, however, the efficacy of tax collection remains in question, particularly given the rampant corruption among border officials facilitating the dumping of goods.
Changes in VAT status
In early 2024, there was a significant alteration in the Value Added Tax (VAT) status of many essential commodities, including sugar, under SI 10A of 2024. These items were reclassified from "zero-rated" to "VAT exempt." The distinction between zero-rated and exempt supplies is critical: zero-rated supplies are taxed at a 0% rate, allowing suppliers to claim input tax credits, whereas exempt supplies are not subject to VAT, precluding the claim of input tax credits.
The transition from zero-rated to exempt status has profound implications for businesses, primarily due to the loss of input tax credits, which raises operational costs and diminishes competitiveness. This change also imposes cash flow constraints, necessitating adjustments to accounting systems and administrative processes. Various sectors, such as agriculture and food manufacturing, will experience increased costs for essential inputs, ultimately leading to higher consumer prices as businesses can no longer offset VAT on their inputs.
In an exclusive interview with Hippo Valley’s Managing Director, Tendai Masawi, during the last quarter of 2024, we discussed the implications of the VAT policy on the sugar industry. Unfortunately, subsequent to that quarter, the Interbank Money Transfer Tax (IMTT) was raised from 1% to 2% on USD transactions, further straining the value chain.
ZiG crisis
The introduction of the ZiG currency, intended to stabilize the economy, has resulted in a complex financial landscape for Hippo Valley. The widening disparity between formal and parallel market exchange rates, peaking at a 74% premium within the first three months of 2024, has hindered companies, including Triangle, from securing USD for essential imports and local supplies. This currency mismatch has engendered cash flow challenges, complicating expense management and financial stability for these firms.
Companies are forced to use the formal market rate pegged by the government, which is overvalued. However, this rate is half to that of the parallel market which is determined by market forces. It is this parallel market rate which is used by suppliers to index their prices of goods. Currently, suppliers are pegging a rate of between 40 per dollar with others due to the fear of midnight policy shifts by RBZ and government even upto to 50 per US dollar depending on the products in question. In 2024, some suppliers stopped favouring supplying goods to the informal sector as the sector pays in US dollars rather than formal which uses overvalued goods. This instance might be the reason while OK Zimbabwe also faced stocking challenges late 2024 to early this year.
The government's stance on the currency conundrum is a paradigmatic exemplar of self-deception. By perpetuating an inflationary monetary policy, the government is effectively leveraging the resultant monetary erosion to amortize its burgeoning debt obligations and subsidize its fiscal programs. This entrenched fiscal profligacy has been a persistent malaise since the seminal Black Friday event of 1997.
Despite our repeated admonitions, the government has obstinately refused to relinquish the local currency and instead focus on establishing a robust foundational framework, including the restoration of confidence, a process that would necessitate a minimum of five years. Furthermore, we have emphasized the imperative of fiscal discipline, wherein the government must align its expenditures with its revenue streams, thereby precluding the perpetuation of a pump-priming monetary policy that artificially stimulates aggregate demand.
It is patently evident that the government is cognizant of the requisite corrective measures, given the intellectual prowess of its policymakers. However, it appears that the government is deliberately eschewing these measures, ostensibly because they benefit from the prevailing fiscal regime. This beggars the question: what are the underlying motivations driving the government's seemingly intransigent stance on this critical issue?
Therefore, it is evident that government policies have systematically undermined the formal sector, jeopardizing its viability. To restore the sector’s functionality, policy corrections are imperative. While businesses must adapt to market conditions and innovate, their substantial operational structures and tax obligations differentiate them from informal traders, who often operate with minimal overhead. The implications of this trend are significant; the informal sector cannot adequately fill the tax or employment void left by formal enterprises. Ultimately, the excessive informalization of the economy poses a severe threat, risking long-term economic stability.
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