eBusiness Weekly
Move to ease pressure on RBZ
Letters of Credit to cover legacy debts
Tawanda Musarurwa
The Zimbabwe Energy Regulatory Authority (Zera) has made submissions to Government to allow some selected service stations countrywide to sell fuel to motorists in foreign currency.This comes as the country’s major fuel companies, say they want Letters of Credit (LCs) being allocated by the central bank for fuel payments to cover legacy debts owed to several fuel traders that bring fuel into the country.
Zera acting CEO Eddington Mazambani told Business Weekly this week that they are piloting a situation where certain service stations and/or pumps sell fuel in foreign currency to motorists with access to hard currency.
“There has been a proposal from one of the players. They came and saw us last week and they have already sort of piloted two service stations, one in Harare and one in Victoria Falls where they are allocating one pump to sell in foreign currency.
“And because of the situation, we have to try and avoid arbitrage and make sure they don’t accept cash, it’s purely by cards that you access the fuel. It’s Zuva Groombridge and Zuva Victoria Falls. And there is a proposal that we have done for our ministry to consider, as we want more players to do that as it will ease pressure on the RBZ in terms of allocating foreign currency. Zera will have a strict access mechanism to ensure that the fuel they access through the RBZ does not go to the pumps in question. We hope that can be operationalised soon if Government assents to our proposals.”
With regard the LCs, fuel companies including Total Zimbabwe, Engen, Petrotrade, Zuva Petroleum and Puma; which came together in 2017 to establish the Major Oil Companies Industry Forum; adopted the use of LCs as a way of circumventing foreign currency shortages.
With a letter of credit, a buyer’s bank can guarantee payment to a seller if certain criteria are met.
LCs help reduce the payment risks on international trade transactions.
Petrotrade acting CEO Godfrey Ncube (who also chairs the Major Oil Companies Industry Forum) said the companies want the RBZ to configure the guarantees in a way that allows them to cover their outstanding debts.
“The Reserve Bank of Zimbabwe has progressively substituted cash allocations by Letters of Credit to help us pay for the fuel.
“We cannot deny that setting up these LCs is a challenge, which creates issues when they need to be rolled over. Our suppliers have also done well by extending credit and keeping stocks in the country.
“We see an opportunity of improvement if we allow LCs to be allocated to old invoices from our suppliers so that their debt moves to avoid bad debt unlike the current situation whereby an LC is for future purchases,” said Ncube.
“We can discuss with our suppliers to allow us to draw out product equivalent to the amount of the LC but pay up old invoices with the longest overdue period.”
According to Ncube, once the debt gap is covered it will become easier for fuel traders to extend fuel in advance of payments. Fuel traders that bring fuel into the country include – but are not limited to – Glencore, IPG, TOSTA and Traffigura.
“The LCs are guaranteed by the RBZ that they will pay in future, as such the companies are allowed to pay in RTGS on the transitional account, which is local, and then the RBZ will then pay later for the fuel that would have been delivered and consumed. But because of the debt that has already been created, the major oil companies are seeing a situation whereby instead of creating LCs for the current product, it would have been better to close the gap that is outstanding, so that the suppliers can supply in advance like what they used to do, because these LCs have to be rolled over. Once you give an LC for three months at the end of that LC there is a need for application for that LC and then the contracts, etcetera. So if we can actually clear the debt then maybe these major traders can actually supply again in advance,” said the Petrotrade boss.
Although Ncube could not give the quantum of legacy debt owed by the major oil companies, he said Petrotrade has an outstanding debt of $2 million.
Zimbabwe has been facing fuel challenges over the past two weeks as the foreign currency situation continues to bite.
