Cables manufacturer –Cafca Holdings Limited says it is shifting its focus to eliminating borrowings in line with increased bank policy and medium-term lending rates which were reviewed last year.
The measures came as part of initiatives to tame supposedly arbitrage behaviour in the economy as well as inflation and exchange rate volatility which weighed on businesses.
The rate at which inflation skyrocketed last year was believed to be a result of excess liquidity from payments on overpriced Government contracts and cheap bank loans taken for speculative activities in currency and stocks.
As a result, annual inflation peaked at 285 percent in August, before decelerating and closing the year at 244 percent. Month-on-month inflation during the year reached its highest in June at 31 percent and closed the year at 2 percent. Government then instituted some measures, including the decision to suspend payments to some contractors while the central bank increased the bank policy rate and medium-term lending rate to 200 percent and 100 percent, respectively.
While the Central Bank highlighted intentions to maintain its tight monetary policy stance to keep a grip on inflation and exchange rate movements, businesses are also arguing this weighs on their operations with the ability to borrow now constrained.
“Our focus will slightly change from hedging against inflation to eliminating borrowings as the company cannot justify interest rates above 200 percent,” said Cafca managing director Robert Webster in the group’s 2022 annual report.
Although the operating environment is expected to remain tight on the back of inflationary pressures and exchange rate volatility, Cafca remains upbeat about achieving good business and profitability for the financial year 2023. Mr Webster said: “Our expectation is that the tightening of the economy will definitely reduce volumes but the decrease will still allow Cafca to be profitable and cash positive.”
According to the group, stocks will be carefully monitored to ensure no sales are lost because of the unavailability of certain cable lines both locally and externally versus the need to slightly reduce stocks to repay expensive borrowings.
Apart from the local market, Cafca also supplies products to Rwanda and Mozambique, which according to its third-quarter trading update contributed to a growth in year-on-year sales. The group however indicated further export gains were offset by a slowdown in the Malawi market due to limited foreign currency availability. During the half year to March 31, 2022, the group also highlighted exchange control delays in getting paid by Malawi customers affected export sales.
“Our customers in Malawi continue to experience difficulty in obtaining foreign currency so sales there are slightly constrained,” said CAFCA in a trading update for the quarter.