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Thu 1 Feb 2007 10:29 AM

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Against all odds

Despite annual inflation averaging 1,000%, a chronic shortage of foreign currency and diminishing disposable income, Zimbabwe's three GSM operators continue to operate successfully in the Southern African country. Even more surprising is the level of foreign interest that still exists for gaining entry into the country's telecoms market.

In every sense of the word, Zimbabwe is but a shadow of its former self. Corruption is rife, as is unemployment and petty crime, and the economy is battling to remain productive, given a foreign currency crush the likes of which have never before been experienced. Official estimates place unemployment as high as 75%, though a vast informal sector exists, trading in all types of commodities, ranging from peanuts to fuel.

It is against this unlikely backdrop that the countries three incumbent operators - Econet Wireless, NetOne and Telecel Zimbabwe - conduct business, and to all intents and purposes, do so quite successfully. While each operator counts fewer than a million subscribers on their respective networks, the the general unavailability of foreign currency has left them facing constraints when it comes to further network expansion.

"Things are not too bad for us from an operational and profitability perspective," a management source at state-owned operator NetOne told CommsMEA. "Like every company in Zimbabwe, our main gripe is in trying to secure hard currency. We are cash-rich in terms of Zimbabwe dollars (Z$), but trying to convert these dollars into foreign currency is a real problem."

Much of the three operators' foreign currency is generated through international roaming and settlements, though there are strict government rules guiding what the operators are and are not permitted to do with respect to the foreign currency earned. One of the most debilitating aspects of the working of the Zimbabwean economy is the government's insistence in keeping an unrealistically strong exchange rate regime with respect to leading world currencies. At this time, the Z$ is pegged at Z$250 to US$1, though on the rampant parallel market it trades at above Z$2,500 to US$1. Such a situation gives rise to real distortions of the true cost of living in Zimbabwe, with items appearing hugely expensive if the government exchange rate is utilised, or extremely inexpensive if the unofficial rate is taken into consideration.

Like other hyper-inflationary economies, physical goods often become more valuable than the money used to pay for them, and for this reason, calling cards have become hedges against inflation in Zimbabwe. Should a subscriber purchase a calling card that offers a certain amount of talk time, and should the tariff rise in the future, that same card can be sold at a price higher than its face-value in order to reflect the inflationary effect. As such, major cities across Zimbabwe are flooded with calling card sellers, and the business of the trading of minutes is brisk.

"We review tariffs every three months and set budgets every six months," comments the NetOne executive. "However prices in the market are regulated by the government." Given the attempts by the government to try and rein inflation in, it approaches the issue of price increases cautiously. In October 2006, a tariff increase was permitted given the move by the state-owned fixed-line provider to raise termination rates to US$0.20 for mobile calls and US$0.15 for mobile calls via the fixed network calls.

The tariff increase raised the cost of calling a mobile from a fixed line to between Z$36.80 (US$0.14 and US$0.015, at exchange rates of 250:1 and 2,500:1 respectively) and Z$43.05 during peak hours. Calls to other fixed line numbers rose to between Z$13.20 and Z$26.58, and between Z$11.85 and Z$23.88 off-peak.

A further tariff rise, amounting to around 75% was effected in January, with rates peaking at as much as Z$123 per minute for peak rate mobile-mobile calls. NetOne, which is the second largest operator in terms of subscriber numbers, behind Econet Wireless, raised its international call tariffs by over 150% in response to corresponding price increases made by state-owned TelOne, the country's international gateway operator. Since the changes, NetOne's international calls are charged at up to U$2 per minute, with its two rival GSM providers, Econet and Telecel, expected to make similar price hikes. TelOne blamed the situation on rampant local currency inflation.

Not only are steep hikes in rates and tariffs a problem, subscribers are also faced with poor network quality as a result of the diminished upkeep of the networks and general network congestion. Econet, the country's market leader, released 600,000 new mobile lines in two tranches of 300,000 each between October and December 2006, without their being sufficient preparation in either the core or the radio network to absorb the new users. As a result, the number of dropped calls and poor reception escalated during 4Q06, and still remain an issue.

It is hoped that improvement is in sight. Last year Econet Wireless was awarded a US$20 million loan from a development organisation in order to improve the quality of the network. As part of the capacity investment, Econet has been talking up the prospect of launching 3G in Zimbabwe during the course of 2007. Econet Wireless chief executive officer Douglas Mboweni believes the introduction of 3G in Zimbabwe has a strong business case and says his company is looking at initially releasing about 50,000 3G lines, which would be over and above the other lines the company would release for normal cellular services.

"Access to high-speed internet is one of the main appeals of 3G," Mboweni is quoted as saying in local press. "It is even possible to use the technology to download and watch films on your computer," he added.

3G coverage is set to be limited only to major cities because of the cost of roll-out, and high-end consumers, businesses and government agencies will be targeted as primary subscribers. Presently, 3G-compatible handsets fetch between Z$2.5 million and Z$3 million on the market.

NetOne and Telecel are not convinced of a viable business case for 3G in Zimbabwe at this point and while viewing Econet's plans with interest, do not harbour active plans to start deploying 3G infrastructure. The move by Econet could in fact prove to be a worthwhile risk given the lack of broadband infrastructure in the country. 3G may prove to be a viable broadband access technology to commercial Zimbabwe.

The turmoil in Zimbabwe's economy has not put off international interest in local assets and it is reported that South Africa based pan African operator MTN has shown some interest in acquiring NetOne. The state operator has had privatisation plans on the cards for some time, but has never exercised the will to start the wheels turning on a sale to a strategic investor.

"NetOne is the pride of the Zimbabwean government, and for that reason it is reluctant to reduce its 100% shareholding," the NetOne source said.

“Things are not too bad for us from an operational and profitability perspective. Like every company in Zimbabwe, our main gripe is in trying to secure hard currency. We are cash-rich in terms of Zimbabwe dollars (Z$), but trying to convert these dollars into foreign currency is a real problem”
“NetOne is the pride of the Zimbabwean government, and for that reason it is reluctant to reduce its 100% shareholding”

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