Offshore funding, LCs boost for local industry

LIVINGSTONE MARUFU

 

Zimbabwe’s central bank will extend more than US$365m to support ailing local industry cater for its foreign currency needs, Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya has said.

The local industry is crying for patient capital to retool and replace obsolete equipment, which is increasing the cost of production making local products uncompetitive.

In his midterm monetary policy statement, Mangudya said the bank is working with its local and external partners to unlock offshore lines of credit to support the country’s industry’s foreign currency needs.

He said Letters of Credit (LCs) worth about US$145m were issued during the first seven months of 2022.

“The bank has also approved around US$70m worth of LCs which are in the pipeline for the importation of essential commodities such as raw materials, plant and equipment, wheat, fertilisers and agro-chemicals,” Mangudya said.

“LCs issuances under the Afreximbank US$150m facility, as well as bank facilities continued to bridge the balance of payments gap for the country through providing a critical liquidity lifeline to the local industry.”

The issuance of LCs comes at a time when foreign banks no longer want to act as guarantors for local companies due to the country’s high risk.

The LCs are complementing the foreign currency auction system but the two have failed to help the local industry to procure enough raw materials for their operations due to   limited foreign currency.

A business or a company that successfully obtains LCs has confirmation that the financial institution, especially the foreign one, is agreeing to guarantee the amount of the transaction and this establishes trust in the transaction since the buyer is guaranteed they will collect the full amount of the deal.

LCs which are usually transferable, depending on the bank or financial institution, from which the letter of credit is procured, are commonly used for international trade — particularly importing and exporting — a lot of trust is needed to access a loan.

The companies are only accessing 30% of their money from the auction and LCs with the rest of the money coming from the parallel market.

The Oil Expressers Association of Zimbabwe president Busisa Moyo told Business Times that there was need to quicken the process of settling LCs.

“There is a tremendous improvement in settling LCs in the past months and we applaud the authorities for that,” Moyo said.

“We are looking forward to utilising the US$150m from Afreximbank as we enter the fourth quarter which tends to be the busiest part of the year.

“The last quarter accounts for 40% of the whole’s requirements,” he said.

The Zimbabwe National Chamber of Commerce president Mike Kamungeremu said the LCs would go a long way in addressing the funding challenges facing the industry.

“It’s a positive development that the industry has utilised around US$145m with another US$70m approved for critical raw materials.

“It is our fervent hope that the US$150m will come on time so that the industry utilises during the festive season will be usually the busiest,” Kamungeremu said.

 

 

 

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