ZIMBABWE could soon experience a shortage of imported commodities after it emerged this week that several local banks failed to honour letters of credit (LCs) to foreign banks in trade finance deals, amid heightened fears the troubled country could see many products disappearing from shop shelves.
Source: Banks plunge deeper into forex crisis – The Zimbabwe Independent February 1, 2019
Melody Chikono/Bridget Mananavire
This could force foreign banks and exporters to demand upfront payment for imports into Zimbabwe. The Reserve Bank of Zimbabwe (RBZ) last month pledged to fund LCs worth over US$400 million after manufacturers warned business would grind to a halt within 30 days unless an urgent intervention was made to salvage the situation.
A letter of credit is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
Owing to Zimbabwe’s acute shortage of foreign currency, LCs are being issued on the back of guarantees from the central bank through various commercial banks in Zimbabwe. Sources within the financial services sector say the RBZ depleted its nostro accounts after making bulk fuel purchases in a bid to avert a catastrophic shortage of the commodity that was threatening to bring the country to a standstill.
When a bank defaults, it is flagged as uncreditworthy by international banks.
A commercial banker who spoke to the Zimbabwe Independent this week revealed that banks were failing to process LCs due to lack of hard currency as foreign suppliers demand cash upfront while corresponding banks also demand cash upfront.
“Because of the country risk, most banks want to be cash-covered 100% in most cases. Cash cover means paying hard cash up-front to cover imports. Corresponding banks are also demanding cash up-front before they can guarantee payment. It is not easy to do business in this environment. The challenge is across the banking sector,” the banker said.
Ratings agency Standard & Poor’s (S&P) last year downgraded Zimbabwe to junk status. Another analyst said correspondent banks had cut ties with their local units mainly because of high country risk and low confidence in the country’s financial sector.
He said one local bank did only two letters of credit and another stopped issuing the LCs just last week.
“The problem is actually with the central bank which is promising what it does not have. A number of correspondent banks have cut ties with the local banks because of perceived country risky resulting in low confidence in the country’s financial sector. One local bank only did two letters of credit and stopped after the correspondent bank cited country risk,” he said.
It also emerged that foreign raw material suppliers who used to trade with local manufacturers are rejecting Zimbabwe’s LCs. A fuel company also said it was experiencing the same challenges.
Zimbabwe’s local industry imports such raw materials as soyabean and maize. Despite RBZ governor John Mangudya’s insistence that their LCs are not being rejected, documents in our possession show that LCs worth millions of dollars have been rejected by foreign suppliers. Mangundya would not be drawn into stating how much had been spent on procuring fuel to date. He also refuted claims that the central bank had run out of forex. Instead, Mangudya said nostro balances have actually increased. However, he did not respond to requests for specific figures.
“The letters of credit are not being rejected as they are being confirmed by reputable banks. Our nostros have gone up significantly. Where is that information coming from?” he asked.
However, documents in our possession show that the central bank recently did not fund LCs valued at US$5 million issued by Standard Chartered Bank (StanChart) to cooking oil manufacturer Surface Wilmar in December 2018. The LCs matured on December 30, sources say, but the bank failed to process the funds. Surface Wilmar suspended operations early this year owing to foreign currency shortages. It has, however, emerged that the edible oil concern was saddled with a legacy debt after local banks failed to process payment for raw materials and other goods from foreign suppliers.
In a letter addressed to the permanent secretary in the Ministry of Finance, George Guvamatanga, dated January 24 this year, Surface Wilmar said upon maturity of the LCs, StanChart was contacted to settle the payment and advised the company that it had not received any funding.
The letter indicates that on January 18 2019, Surface Wilmar officials met with Mangudya and discussed the LC issue. At the meeting, the central bank chief confirmed that they were going to agree on a structure with StanChart to settle the outstanding amounts by January 21, according to the document.
“We write to advise that the following letters of credit US$3 910 060-30 and US$1 011 283-20 totalling
US$4 921 343-50 were used by Stanchart at the back of an undertaking by the Reserve Bank of Zimbabwe to provide the requisite foreign currency and matured on 30th December 2018. On maturity we contacted Stanchart to settle the letters of credit and they advised that they had not received funding. On 18th January 2018, we had met with the governor of the Reserve Bank of Zimbabwe where we discussed among other issues, these LCs and he confirmed that they were going to agree on a structure with Stanchart to settle the outstanding amounts by 21th January 2019,” Surface Wilmar said.
“Today 24th January 2019, the LCs have not been settled and therefore Stanchart are in default. Attached is a copy of the emails from Mr Alois Nyamhunga confirming this position. Kindly note that this is a clear sign that the banking system in this country has collapsed and in particular, none of our suppliers will accept an LC(s) issued by Stanchart or from local banks if not supported by an A-Class Bank offshore.”
However, StanChart CE Ralph Watungwa said his bank never defaulted on any LC.
“As a matter of policy, it is not appropriate for us to comment on customer transactions as such matters are confidential and we fully respect and abide by that for all our clients. However, we can assure you that we have not defaulted on any letters of credit and have no further comments on this matter,” he said.
Sources in the energy sector told the Independent this week that they were facing challenges importing fuel into Zimbabwe. “Suppliers started rejecting LCs since Thursday last week, and it has been hard trying to convince them to accept them. The only option we have now is using hard cash, but that is not sustainable at the moment because of the forex shortages we have here,” a fuel importer said.
Oil companies in December proposed that the LCs that were being allocated by the central bank for fuel payments also cover their legacy debts.
Surface Wilmar this week (see interview on Page 12) also revealed that, among other obligations, the RBZ is owing the company’s suppliers in excess of US$5,6 million for crude oil it supplied during the election period. Surface Wilmar and Olivine Industries CE Sylvester Mangani told the Independent that the RBZ asked that the manufacturer to supply cooking oil during the election period and the payment was supposed to be made just after the elections.
“During elections, we were asked by the (Reserve Bank of Zimbabwe) governor (John Mangudya) for help to import crude oil worth US$5,6 million and we obliged by asking our suppliers to assist. The US$5,6 million was supposed to be paid immediately after elections. It’s now seven months and nothing has been paid. This has now resulted in huge RTGS balances in our current accounts at banks, which we owe to our shareholders and suppliers, and cannot pay them,” he said.
Confederation of Zimbabwe Industries president Sifelani Jabangwe said a lot depended on the relationship between a manufacturer and his or her suppliers.
“On the recent credit lines, no one has yet come forward to say they are being rejected. I think it has to do with the relations one has with a supplier and usually when someone has legacy debt it’s very difficult to secure new supplies, a situation which many manufacturers are in. Remember, an LC is a promissory note, so some may be hesitant to take the LCs by their nature.”