CBE decision to grant long-standing LC requests gets mixed reception

Ethiopian importers that had been waiting for the approval of Letter of Credit (LC) requests for close to one and a half years have greeted the Commercial Bank of Ethiopia’s decision to award the LCs with mixed responses.

While some welcome the approval of their LCs, others say that the preconditions are too stringent and effectively hinder their efforts.

The CBEs requirement from importers to deposit the full amount they inquire for without any changes to unit prices from a year and a half ago are two of the main preconditions that have caused concern. 

However, according to the memo released by the CBE on July 29th, importers are allowed to decrease the quantity to be traded as long as they maintain the final amount without a decrease in unit price above 5 percent. 

Such a policy, according to those that have voiced their concerns, opens up the likelihood of traders looking towards the black market. Indeed, it seems unfeasible to require traders to implement unit prices and final prices based on more than a year ago when the global market has been volatile during the same period due to the COVID-19 pandemic’s economic effects.

On the other hand, those that welcome the decision, agree with the CBE that an allowance to decrease quantity is enough to offset change in prices. Furthermore, they say that importers with concerns should take into account the galloping exchange rate and the shortage of the foreign currency that the country faces.

The difference of opinion seems to stem from differences between bulk importers and heavy machinery importers. Experts argue that while changing quantity is a policy that may work for those that seek to import huge quantities, those that are seeking to import heavy machinery and similar items do not have that luxury.

As such, a strong argument is being made that the CBE should adopt a case by case instead of a one size fits all policy. 

Another gap that has emerged with the current policy is that the CBE allows for the approval of two LCs by merging the final amount for one with the goods of the other. This, experts argue, allows bigger enterprises more recourse than smaller enterprises and is likely to cause issues down the line.

Capital

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