Letters of credit: RBZ tightens screws
Source: Letters of credit: RBZ tightens screws | Theindependent (Zimbabwe)
IMPORTERS are struggling to access letters of credit to buy critical raw materials as the Reserve Bank of Zimbabwe has tightened screws on the issuance of the facility.
Businesses told the Zimbabwe Independent that the foreign exchange auction system was failing to satisfy demand, hence importers resorted to offshore lending. The RBZ entered an agreement for a US$600 million facility with Afreximbank to fund importers, among other things, but the apex bank has of late limited the number of letters of credit.
John Mangudya, the central bank governor, said letters of credit were now reserved for bulk essential commodities, such as fertilisers, grain and fuel.
Mangudya said: “This is designed to supplement the resources accessed by entities through the foreign exchange auction system, and to support the productive sectors of the economy and to benefit from economies of large-scale procurement.
“The Afreximbank line of credit to support the letters of credit is being renewed and shall be in use soon.”
The central bank chief said there was foreign currency exchange monthly demand of US$200 million, translating to US$2,4 billion per year.
Importers said there was a need to relax the conditions needed to access letters of credit.
“Yes, letters of credit are still being accepted but there are challenges both locally and abroad. Nothing has really changed over the years given the country’s risk and ease of doing business,” an importer said.
Mangudya admitted that the country’s risk profile had affected Zimbabwe.
“The perceived country risk for Zimbabwe has for a long time been high, negatively affecting the flow of international capital to Zimbabwe,” he said.
Importers bemoaned the complexities involved in getting the bank facility.
“The letters have to be confirmed by the central bank. It used to be a bit better because we would access letters of credit on the back of the Afreximbank facility.
“One can have the balance of credit confirmed either by Standard Chartered International or Ecobank. They have always been the easiest banks. But the RBZ has changed the rules and it’s a cumbersome process now,” the source said.
“Most local banks need approval of the Reserve Bank to issue a letter of credit. RBZ is the lender of last resort; it guarantees these letters. The available countries’ cash flows determine the approval. Basically an LC says you are going to pay in the future, so RBZ checks if it’s in a position to pay at such a time.”
Another importer told the Independent that offshore support was scarce as lenders were worried about Zimbabwe’s high risk.
Zimbabwe has been scoring poorly over the years on the risk index, as issues to do with corruption and ease of doing business remain unsolved.
“Obviously international banks view Zimbabwe as risky, so they do not easily provide credit lines for companies. International banks are even more scared. The country’s score on the corruption index and ease of doing business has worsened the situation,” another source said.
While Afreximbank regional chief operating officer for Southern Africa, Humphrey Nwugo could not comment on the availability of a valid line of credit with RBZ citing confidentiality, he said they will continue to support borrowers in the private and public sectors.
“However, we remain available to support eligible borrowers in both private and public sectors. For reasons of confidentiality, it is our policy that we do not disclose details of bilateral relationships with specific customers,” he said.
Nwugo said Afreximbank focuses on financing and promoting intra- and extra-African trade consequently providing support to importers and exporters on a case-by-case basis, depending on several criteria, including the eligibility of the potential borrower.
“Therefore, these are not active lines of credit as such, but specific, once-off support, based on clients meeting our lending conditions,” he said.
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