LIVINGSTONE MARUFU
Zimbabwe’s central bank has been forced to re-issue letters of credit (LC) to finance local companies’ international trade to avert a crippling foreign currency crisis amid revelations the auction system is failing to satisfy demand from companies.
RBZ dumped the LCs on the advent of the foreign currency auction system in June last year hoping then companies’ needs would be catered for by the platform. Local companies have been pushing for the return of LCs due to the crippling shortage of foreign currency on the formal market.
RBZ governor John Mangudya said last week that a US$150m LCs facility with Afreximbank is in place which will see participating banks issue letters of credit to their qualifying clients to import essential raw materials and other inputs to support the foreign currency system.
Mangudya said the LCs will reduce pressure on the auction system.
“The LCs will go a long way in easing pressure on the Foreign Exchange Auction System as some of the critical imports will be financed under this arrangement,” Mangudya said.
Due to the crippling shortage of foreign currency on the formal market, local companies have been pushing for the return of LCs but the central bank had been turning a blind eye to companies’ requests, hoping the auction system would provide adequate forex for the industry.
That did not happen as local companies continued to struggle to access adequate forex to import critical imports.
In the event that their bids are accepted, companies have been experiencing delays in accessing forex allotted to them at the RBZ foreign exchange auction system.
Industry players said it is taking at least two months to access the funds.
Consequently, the severe shortage of forex at the weekly auction system forced local companies to source hard currency to import critical raw materials from the parallel market, where premiums are punitive.
Multiple industry players, who spoke to Business Times, said they were relieved by the return of the LCs as the foreign exchange auction system was failing to meet demand.
Industrialist Sifelani Jabangwe said the move by RBZ will improve industry’s capacity utilisation.
“It’s a timely intervention as the industry’s manufacturing peak begins in September till the end of the year. With LCs supporting the well-established forex auction system, companies’ capacity utilisation is expected to improve significantly,” Jabangwe said.
Another industrialist, who preferred anonymity, said the move to re-introduce LCs was long overdue.
“We have been advocating the return of LCs to complement the foreign auction system but the authorities were not willing to accept the gaps left by the system. We are happy that they have allowed the return of LCs to reduce pressure on the forex market, however, the central bank should increase the facility to above US$300m,” he said.
The Oil Expressers Association of Zimbabwe (OEAZ) members have been calling for the return of LCs to reduce the gap left by the auction system.
However, efforts to get a comment from the OEAZ president Busisa Moyo were futile. His mobile number continuously went unanswered.
Before the advent of the forex auction system on June 23 2020, LCs were a major source of forex for various companies.
But most companies opted for the parallel market than LCs that time as it had high premiums which could equal or surpass the black market.
Mangudya said the central bank will continue engaging its offshore partners to unlock external funding to support the economy.
He said the bank successfully restructured its obligations to Afreximbank during the first half of 2021 into a longer-term facility, a move that has reduced the repayment burden and unlocked capacity to avail more resources for balance of payments support to the economy.
Mangudya said the interbank foreign exchange market continues to be operational using the auction-determined foreign exchange rate apart from the foreign exchange auction system which accounts for around 30% of the total market foreign exchange transactions.
The interbank foreign exchange market traded around 7% of total market transactions from January to July 2021 with around 63% of the market transactions being processed through bank customers’ foreign currency accounts.
