Local banks yesterday released letters of credit worth US$50 million, backed by a revolving US$225 million Afreximbank facility, under an arrangement expected to alleviate worsening fuel shortages which have seen long queues sprouting all over the country.
By Kudzai Kuwaza
This comes as it emerged that the convoluted issuance of the letters of credit was one of the main reasons why there has been an acute fuel shortage of late. The fuel situation only improved during the Easter period and during the 60th Zimbabwe International Trade Fair because government had released fuel from strategic reserves.
Officials in the banking sector revealed the letters of credit were released to four major companies, namely Zuva Petroleum, Puma/Sakunda, Total and Engen. The amount will be drawn down on a revolving basis and will be enough to secure supplies for more than two weeks. After this, there will be a continuous release of funds from the US$225 million facility.
The country needs 130 million litres of fuel monthly which translates to 32,5 million litres weekly. In two weeks, US$65 million through letters of credit will secure 80 million litres of fuel working on a revolving basis.
Yesterday, petrol and diesel began flowing into the market from fuel farm tanks in Msasa and Mabvuku. Of late there have been severe fuel shortages characterised by long queues snaking around the city in scenes reminiscent of 2008.
Banking officials revealed that although the main reason for the shortages has been the foreign currency crunch, there is also the technical problem associated with the issuance of letters of credit which is the main instrument being used to procure fuel.
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 a payment on the purchase, the bank will be required to cover the full or the remaining amount of the purchase.
“Ordinarily, local suppliers use cash secured from the Reserve Bank of Zimbabwe or from their own sources to pay for fuel which is usually available in big fuel farm tanks in Msasa and Mabvuku,” a banker explained.
“International suppliers like Glencore, Trafigura, Independent Petroleum Group, Total and Engen bring fuel to Beira and then take part of it to Zimbabwe for easy supply and availability to the local market upon payment to them by local suppliers either in cash or through letters of credit. Because of the shortage of forex, local suppliers go to RBZ for allocation instead of going to commercial banks or into the forex market.”
The banker added: “However, the local suppliers mainly use letters of credit to pay for fuel. What happens is that a local supplier goes to a bank and requests establishment of a letter of credit which has to be confirmed by the guarantor, which in this case is Afreximbank. Before a guarantee is issued, there is a process of checking the documentation, the integrity of the issuer and the risk associated with it.
“Only after confirmation by the guarantor does the letter of credit get accepted by the international supplier.
After that, the international supplier can then release to the local supplier and to the market. The maturity of letters of credit takes at least 90 days on average. The letters of credit have been spread across practically all local commercial banks.”
Strategic reserves are under the control of government and are directly imported by government during critical periods.
“Lines of credit which used to pay for supplies have dried up due to country risk, which is why Zimbabwe has resorted to these methods of payment to guarantee fuel supplies,” a banker revealed.
Energy minister Jorum Gumbo told the Zimbabwe Independent last night that he would talk to RBZ governor John Mangudya over the development.
“I will speak to Mangudya to find out. I was in a Cabinet meeting today but that is good news,” Gumbo said. “The lines of credit will ease our situation very much. International companies are refusing to release fuel unless they are paid. It is a problem but we will keep pushing.”
Mangudya yesterday said the payment processes were being revisited and fixed.
“Going forward the central bank is going to be more meticulous in ensuring that the letters of credit are well-structured and timed to take into account timing factors between their establishment, confirmation and shipment, as well as release of fuel into the local market,” he said.