Govt considers LCs return

PHILLIMON MHLANGA

Government is mulling the reissuance of letters of credit (LCs) for importers to buy critical raw materials as foreign currency auction system is failing to satisfy demand, Business Times can report.

Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya, said the request for the return of LCs was under serious consideration.

 “There have been requests that we make available money through LCs. That is being attended to,” Mangudya said.

Previously,  RBZ had an arrangement with African Export-Import Bank (Afreximbank) which extended a facility where importers would be issued with Afreximbank-backed LCs, which are issued in place of cash payment.

RBZ stopped issuing the facility last year after the introduction of the foreign currency auction system. But companies have failed to get adequate forex from the auction, forcing them to source foreign currency from the parallel market.

Consequently, they have been pushing for the return of LCs due to the crippling shortage of foreign currency on the formal market.

Industry players say bringing back the LCs to cover for the shortage would improve production in the country.

Companies have been using the LCs to finance international trade where the RBZ was the underwriter, assuming the counter party risk of the buyer paying the seller for goods.

The RBZ had hoped that the auction system would provide adequate forex for the industry.

However, this has not been the case.

The shortage is impacting business, some company executives told Business Times.

To buy US$1 at the auction system this week, it requires about ZWL$85:US$1. On the parallel market, one would fork out about ZWL$140 to buy US$1.

The Confederation of Zimbabwe Industries (CZI) this week confirmed that few companies were accessing forex from the auction system.

CZI also said companies were also experiencing delays in payment of the allotted bids.

“The foreign auction system was put in place as a price discovery mechanism and to avail foreign currency on the formal market,” CZI said.

“However, when supply and demand became somewhat distorted at the auction when all demand was allocated but settlements significantly delayed, this signalled that the auction had now lagged behind in price discovery and was now operating at an almost fixed rate that it could not clear, the parallel market rate picked up.”

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