British American Tobacco’s Zimbabwean unit has started cut rag exports to improve foreign currency generation, so as to hedge the business against rising inflation.
The country’s largest cigarette manufacturer said the trading environment continues to be challenging characterized by the lack of foreign currency for imports as well as the widening gap between the interbank rates and the parallel rates.
Following the introduction of the new currency – the Zimbabwe dollar – the exchange rate has deteriorated from 2.5 Zimbabwe dollars per US dollar in February 2019 to 65 Zimbabwe dollars per US dollar this month. Annual inflation was 676.4% in March 2020.
During the first quarter ended March 31, 2020, BAT Zimbabwe recorded a 10% increase in volumes, compared to the same period last year. This was attributed to various efficiencies from the new trade marketing tools that are being used by the company.
Revenue, on a historical cost basis, rose sevenfold compared to prior period last year. This was due to price increases which were taken to manage the inflationary pressures faced by the company. “The company also commenced cut rag exports in March 2020 to assist in foreign currency generation,” BAT Zimbabwe said in a trading update.
In the outlook, BAT Zimbabwe said the economic environment is expected to remain challenging and the impact of Covid-19 will be evident in the next quarter.
“The business expects a drop in volumes in the second quarter due to trading for a few days in April 2020 and reduced operations in May 2020,” it said. “The tobacco selling season has opened and we will continue to monitor the price movements and how these will impact our business.”
BAT’s major shareholders include BAT International Holdings (UK), Old Mutual Life Assurance Company Zimbabwe Limited, BAT Zimbabwe Tobacco Empowerment trust and BAT Zimbabwe Employee Share Ownership Trust. However, head office will only assist the firm in terms of engaging with suppliers to get longer payment terms, while trying to secure foreign currency to stop from being cut off supply.