Industry demands return of LCs

…As forex crunch bites


Foreign currency-starved firms want the central bank to bring back the African Export-Import Bank-backed letters of credit (LCs) it stopped issuing last year to plug the hole as the forex shortages stall the importation of raw materials and spares.

Companies say they are not getting adequate foreign currency from the auction system introduced last year warning their viability is being threatened.

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

But the central bank stopped issuing LCs soon after the introduction of the foreign currency auction system last year in June.

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

However, business executives who spoke to Business Times this week said the crux of the matter was that the market requires at least US$320m per month at a time when the auction system is availing an average US$100m, a figure which covers about a third of the market requirements.

Oil Expressers Association of Zimbabwe (OEAZ) president Busisa Moyo said the sector was not getting enough forex from the auction system.

“We are pleading with RBZ to bring back LCs to improve capacity utilisation as we are producing at 30% from 50% during the time of LCs issuance,” Moyo told Business Times.

“We fear that the insufficient funds for our members will culminate into shortages or force the government to use more forex on importing crude oil for the firms.”

Moyo said OEAZ members were getting US$2m a week but required about US$3m a week.

The increased participation of companies caused the central bank to limit some players in various sectors to ensure the cake is evenly distributed, a move that has seen capacity utilisation dropping.

The shortage is impacting business, the business leaders said. Some are now forced to source forex from the parallel market where premiums are higher. The shortage of forex from the auction has seen premiums rising on the alternative market.

To buy US$1 at the auction system this week, one requires ZWL$83. 3725. On the parallel market while one would fork out ZWL$130 to buy US$1.

In December.Olivine chief executive Sylvester Mangani said the company needs LCs to improve capacity utilisation which is now below 30%.“As cooking oil firms we are facing raw material challenges due to foreign currency shortages.

We are getting US$500,000 per week from the auction system, an amount which we are using for one and half days. We are imploring the central bank to resume LCs issuance to start producing at above 60% capacity utilisation,” Mangani said.

Industry executives say forex auction system has been strained resulting in companies getting paltry amounts inadequate for their operations.

 “…the industry needs various channels of forex to operate fully and the return of LCs is one of them,” Henry Ruzvidzo, Confederation of Zimbabwe Industries president said yesterday.

But RBZ deputy governor Kupukile Mlambo told Business Times that the auction system was efficient and the best way of allocating forex to the companies.

“The time we saw that our forex auction system was effective, we stopped the issuance of LCs. We made it a policy that anyone who wants to access forex should come through auction and get what they can,” Mlambo said.

“The auction system is good in that what a firm puts on the table is what it gets depending on the rates of the day.”

An economist, who requested anonymity, said the country was in a fix because there was no real interface between the government and industry to digest the problems they face.

 “When the engagements are called for between authorities and industry, industrialists don’t bring up such issues.

Instead they will sing praise hymns to the leaders.

During the first half of last year, manufacturers were calling for the abolishment of LCs saying they were exorbitant, now that they were abolished, they are calling for their return,” the economist said.

“They should tell the relevant authorities that we need the auction but whenever there is a gap we need LCs to cover for shortages but at a reasonable rate not high interest rates as before.”


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