‘LCs to sustain critical imports’

The Sunday Mail

Tawanda Musarurwa

Letters of Credit (LCs) will be rolled over to sustain Zimbabwe’s critical imports until such a time that the country builds up significant foreign currency reserves, central bank governor Dr John Mangudya has said.

Letters of credit are debt instruments that are issued by banks for the purposes of importation, that typically have a tenure.

These debt instruments can be payable after 60 days, 90 days or 180 days.

In view of prevailing foreign currency shortages, the majority of companies are currently dependent on LCs for critical imports such as fuel, raw materials and equipment, which are required to keep production going.

And the Reserve Bank of Zimbabwe (RBZ) has been allocating LCs to local companies for the settlement of foreign obligations such as the importation of raw materials critical for industrial production.

The authorities say continued use of the LCs will give the economy time to work on increasing its foreign currency levels.

“Letters of Credit are on a revolving basis, and are giving us time to mature. It means that after the LCs have been reimbursed we will roll them over, or in other words, we issue new ones,” said the RBZ governor.

“LCs are a very good form of security because you are delivering goods against documents. All countries use letters of credit. But if the prices are all the same and it’s such a time that our foreign currency is now sufficient, we won’t need to borrow.”

Following the promulgation of Statutory Instrument 142 of 2019, which ended the long-standing multi-currency system, and effectively re-introduced the “Zimbabwe dollar” as the sole legal tender for local transactions, foreign currency reserves are now significant in leveraging the local currency, and in ensuring that the country is insulated from external shocks.

Traditionally, central banks use foreign currency reserves — mostly held in the United States dollar — to support economic growth by ensuring there is a buffer to defend the local currency and also guaranteeing for liabilities such as external debt.

Analysts and the RBZ itself have highlighted that the problem facing Zimbabwe is not one of foreign currency shortages per se, but one of constrained output.

“We are not in a foreign currency crisis, but a crisis of production,” said Dr Mangudya last week.

He said Zimbabwe needs to boost its manufacturing output and exports in order to earn more foreign currency.

Official figures show that Zimbabwe’s Nostro Foreign Currency Accounts (FCAs) currently hold around US$1 billion (which calculates to about three months import cover. But money in FCAs belongs to individuals and companies, and is not controlled by the RBZ).

The use of LCs for critical imports in the foreseeable future will also ensure that foreign currency inflows will be directed to the interbank foreign currency exchange market.

Strengthening the interbank market will have a diminishing effect on the efficacy of the parallel foreign exchange market.

Last month, the central bank put in place LCs to the tune of US$330 million for the importation of essential commodities that include fuel, cooking oil, and wheat.