The Reserve Bank of Zimbabwe (RBZ) says it has worked out a mechanism to ensure Letters of Credit (LCs) for the procurement of fuel overlap to minimise supply side gaps causing shortages that manifest in long queues in most parts of the country.
This comes as it emerged that many fuel dealers do not have adequate local currency to match the equivalent foreign currency they require to procure large volumes of fuel, as demand for petroleum in Zimbabwe continues to grow exponentially.
Dealers need more funds after the RBZ announced in the 2019 Monetary Policy Statement the decision to relinquish the 1 to 1 parity exchange rate policy between the US dollar and other forms of payment that include bond notes and electronic dollars.
At that point, RBZ governor Dr John Mangudya also introduced local currency known as RTGS dollar (bond notes and coins and all electronic balances of this physical units of bond notes/coins), which he floated and started trading on the interbank at $2,5 to the US dollar.
Effectively, this meant that the amount of local currency dealers need to hold or avail in order to obtain foreign currency at the going interbank exchange rate suddenly ballooned. The RTGS dollar interbank rate is now hovering around 3,38 to the green back.
RBZ governor Dr John Mangudya told Business Weekly in an interview this week that the central bank had done everything humanly possible to minimise the gap between establishment of LCs, confirmation of LCs and eventual delivery by the supplier.
A letter of credit, also known as a documentary credit or banker’s commercial credit, or letter of undertaking, is a financial instrument used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods.
The bulk of fuel imports and other key essentials in Zimbabwe are now being paid for using LCs, which are guaranteed by the African Export and Import Bank (Afreximbank), which entails a chain of processes until orders are confirmed and delivery done.
But while the RBZ governor said he had done all it takes to improve the supply and availability of the precious commodity, he said the actual delivery of fuel was a matter outside the realm of both Government and the bank, as this rested on the supplier.
The RBZ chief’s comments come on the back of the persistent shortages of fuel since late last year, as the prevailing limited availability of foreign currency have resulted in supply gaps in the market.
Zimbabwe has over the past few months also witnessed a more acute shortage of fuel amid fears that speculation and arbitrage might be at the centre of the shortages of this precious commodity.
Government attempted to resolve the challenges by hiking retail prices in January this year, which brought a brief respite before shortages re-emerged with long queues forming all over once again.
Before the upward adjustment, Zimbabwe consumed 4,7 million litres of diesel and 3,8 million litres of petrol per day— most of which was believed to be for luxury and speculative purposes.
“We have been working flat out to minimise the time difference between the establishment of the Letters of Credit (LCs) and delivery of fuel; it means the overlaps of LCs will cover the gaps in the supply of fuel,” Dr Mangudya said.
“But while ourselves (Reserve Bank of Zimbabwe) will be working on minimization of the time difference (between LCs and deliveries), the supply side is outside our control.
“The supply side is for the supplier. So, I can work on the LCs to see that establishment, confirmation are done, but the supply side is outside the Reserve Bank of Zimbabwe or even the Government of Zimbabwe,” he said.
While at all times fuel marketing firms hold large stocks of the commodity in the country at Msasa and Mabvuku fuel storage tanks, the fuel is held in bonded warehouse where its release is only upon confirmed payment.
Dr Mangudya said the logistical chain from initiation of fuel procurement to payment and delivery of the commodity was a long process and involved several players in between who must also make payments that need confirmation before release of commodity for distribution is authorised, which causes delays in delivery, hence the shortages.
“Fuel, is distributed through service stations; through dealers. While Zuva, Total, Puma and Engen are the major fuel marketing companies in Zimbabwe, they operate through other dealers who need to pay for the fuel.
“So it (fuel imports) depends on whether those fuel dealers have the cash or enough money in their banks. The fuel dealers can tell you that sometimes they can only pay for say $10 000 when the demand for fuel requires $20 000.
“In the fuel value chain, there is the payment mechanism, the supply mechanism, then the distribution mechanism. Each one on that value chain requires payment; from the need to pay first to the supplier; supplier then needs to deliver and the one who is distributing fuel also needs to pay for the fuel.”
Zimbabwe experienced acute fuel shortages towards the end of last year, after consumption inexplicably vaulted by 77 percent to 480 million litres in the six months period June to November 2018 compared to the same period the prior year.