Legacy debt choking industry as credit lines dry up

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Tinashe Makichi

Industry is in a dilemma over delays by the Reserve Bank of Zimbabwe to  put forward a settlement plan for legacy debts, which were ringfenced following changes in the monetary policy in February.

This comes as foreign suppliers have blocked all credit lines until all debts owing are paid. The few that are still supplying are now putting forward stringent pre-payment terms. The effect of this has shown through the decline of imports with latest trade data showing that February imports dropped 35% to $370 million on last year’s $575 million.

In his Monetary Policy Statement in February, RBZ governor John Mangudya announced that all foreign liabilities or legacy debts due to suppliers and service providers such as the International Air Transport Association (IATA), and declared dividends among others, shall be treated separately after the registration of such transactions with the Exchange Control unit of the Bank for the purposes of providing sufficient information that will allow the RBZ to determine the roadmap for an orderly payment of the legacy debt.

When the interbank market started on February 22, banks could only take fresh telegraphic transfers using the forex allocation system that the central bank had come up with.  Its widely believed that the foreign currency legacy debt runs to close to $1 billion.

Now industry says that the lack of a settlement plan poses a new debilitating challenge as raw material suppliers have tightened payment terms or in some instances have stopped supplies. Zimbabwe is largely an import-dependent country.

Sifelani Jabangwe, the president of the Confederation of Zimbabwe Industries (CZI), told Business Times that delays in coming up with a settlement plan for legacy debts has left most manufacturers suffering double jeopardy.

CZI is currently engaging the RBZ to come up with a plan while it is struggling to not compromise economic growth.

“The issue of the settlement of legacy debts is a challenge that has led to
most of our members failing to access critical raw materials from
their suppliers as the supply taps have been closed,” Jabangwe said. “At the moment we are in the process of engaging the RBZ about the settlement plan.

“Our members have since submitted their foreign currency backlog to the RBZ and what is left now is get communication from the RBZ on what it intends to do in settling the debts. The bottom line is that any further delay in settling the debts will cause a lot of companies to be exposed to the volatile exchange rate.”

Former ZNCC president Divine Ndhlukula said that the country was in a Catch22 situation.  “The first question would be where RBZ would get that money to settle those foreign legacy debts. That situation of ring-fencing legacy debts is going to create a lot of bottlenecks  which is why we have also seen foreign currency exchange rates shooting over the roof. The fact that they have ring fenced means that no supplier in his/her right mind will supply without getting a clear plan as to how their debts will be paid back especially the legacy ones.”

Industry is also worried about the continuous failure to access foreign currency on the interbank currency exchange platform, saying the current rate is making it difficult for anyone to sell.

The RBZ recently said that it was allocating about $12 million per week to the banks while a gradual increase would be expected upon finalisation of a credit line. However there have been reports about the ability and capacity of banks to take up the allocations with one bank getting an allocation of $4 million per week. The country’s foreign currency requirements are around $700 million.

Industry is also concerned about the continuous gap between the interbank rate and the parallel market rate. The interbank rate is currently at $3.17 against parallel market rates of between $4.80-$5

“There is need for the rate to match the parallel market in order for us to start seeing people selling on the interbank platform. As it stands, no one is willing to part with their forex at such a low rate,” said a manufacturer.