Govt Resorts to Letters of Credit Issuance for Raw Material Importation Support

By Alois Vinga
Faced with an acute foreign currency crisis which has forced several companies to scale down on production, government says it has now resorted to facilitating the issuance of Letters of Credit (LOCs) in a bid to enable industry to import raw materials.

Speaking to Business Thursday, Industry and Commerce Minister, Mangaliso Ndlovu revealed that a new measure to mitigate the challenge was already being implemented.

“Government has availed a number of letters of credit and manufacturers have since begun to receive them. So the forex outcry that was initially there has now reduced,” he said.

Quizzed on whether this was a sustainable solution, Ndlovu admitted this was a stop gap measure to bridge the current forex shortages and the need for industry to produce.

According to business experts, LOC is a legal document from a buyer’s bank or financial institution representing a promise to pay the holder and sellers in commercial transactions.

It is often required before shipment of goods with banks taking the obligation to pay.

This comes after manufacturers, through the Confederation of Zimbabwe Industries (CZI), last month told government they were running out of raw material due to the acute shortages of foreign currency.

Commenting on the new initiative, CZI president Sifelani Jabangwe expressed optimism over prospects of its success.

He confirmed most manufacturers have already begun receiving Reserve Bank o + f Zimbabwe guaranteed LOCs through their respective banks.

Sifelani said suppliers will be paid through inflows from the tobacco selling season and other future forex sources.

However, Zimbabwe National Chamber of Commerce (ZNCC) chief executive, Chris Mugaga warned the initiative exposed government to risks which could turn disastrous.

“The risks being carried by government could be overwhelming and the moment it defaults on payment, the situation could worsen the already troubled economy’s ratings.

“Apart from this, there is no guarantee that the LOCs will be accepted by sellers and this means that there is need to depart from such piecemeal solutions and address the real issues holistically,” he said.

The ZNCC boss added that raw material shortages are not the only challenges confronting industry. He urged authorities to focus on the policy environment.

Renowned economist, Doctor Godfrey Kanyenze raised concern on the practicality of the LOCs arguing that the initiative is being introduced on top of other existing government arrears.

“The country already has a forex payment backlog to airlines, pharmaceuticals and some key global business institutions have devised ways to avoid Zimbabwe due to these challenges.

“So how then are suppliers, the world over, who are well aware of our economic challenges going to accept such guarantees,” he queried.

source:new zimbabwe

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