eBusiness Weekly
Martin Kadzere
Zimbabwe’s risk profile took a heavy knock following last week’s violent demonstrations organised by opposition parties, non-governmental organisations and civil society actors, amid revelations some foreign insurers are now declining to provide for cover letters of credit issued by local banks.
Letters of credit are issued in place of a cash payment to a supplier. In the case of Zimbabwe, the central bank has been allocating foreign currency through LCs to local companies for the settlement of foreign obligations such as the importation of raw materials critical for industrial production.
In the process, local banks issue a letter of credit using foreign lines of credit usually with another bank in a foreign country, which has foreign currency reserves.
The LC is issued in favour of a local importer for the benefit of a foreign supplier.
The foreign commercial bank, also known as the confirming or intermediary bank, confirms irrevocably that a foreign supplier will receive the money within an agreed period, for instance 90 to 180 days after delivery.
In order to support an LC, the confirming foreign banks usually take out insurance in case the issuing local bank fails to remit foreign currency to the confirming or corresponding bank.
Zimbabwean banks require support of the central bank to remit the amount to the confirming commercial bank using various financial mechanisms.
However, last week, business came to a standstill following violent demonstrations that left some people dead, scores injured, property destroyed and shops looted in what industry say cost the country $300 million.
More than 1 000 people have since been arrested in connection with violent protests and a sizable number has already been jailed.
Insurers more cautious
Industry players told Business Weekly this week that the refusal by some foreign insurance companies would effectively render the “letters of credit route moribund”.
“If correspondent or confirming banks cannot take out insurance on LCs for whatever reason, the chain is broken and LCs cannot be issued and none of the local banks nor the central bank can really assist.
“The LC route becomes moribund,” said Busisa Moyo, the chairman of the Oil Expressers Association of Zimbabwe.
Moyo said the insurance firms were becoming more cautious given the “little prospects of honouring obligations if we are burning our own country. People start to predict business failure”.
“If you have peaceful demonstrations, people will have confidence in you,” he said.
In the face of the critical shortage of foreign currency in Zimbabwe, the majority of companies are currently dependent on LC’s for critical imports, such as raw material and equipment, needed to keep production going.
Economic analysts said the violent demonstrations of last week attracted international attention and created significant negative perception, which would frighten international capital.
“Building on this, it is important therefore to note that we must always engage in dialogue as opposed to direct confrontation, which raises the risk premium of a country,” said economist Gift Mugano.
This week, President Mnangagwa denounced the violence saying while it is everyone’s right to protest, any demonstration should be done peacefully and within the law.
The President, who was away in Eurasia when opposition parties and its affiliates unleashed an orgy of violence on the public, said the nation should be united and begin a national dialogue for the economy to grow.
Economist Brains Muchemwa said social unrest and the associated strain on business would dent confidence and elevates the country risk profile.
“Resultantly, the associated anxieties result in foreign providers of financial services having to review the terms of engagement in order to protect their capital, more so considering
that most cross-border insurance providers don’t insure losses arising out of social unrest.”
Confederation of Zimbabwe Industries president Sifelani Jabangwe, said Zimbabwe was now paying the costly price for failing to hold peaceful demonstrations.
“How do you expect to win confidence of the international community when you destroy properties and assets whenever you are angry? It is not about protest but the violent component of the demonstration,” Jabangwe said.
