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BusinessLC payment defaults pile as forex retention shrinks

LC payment defaults pile as forex retention shrinks

Banks stop approving new LCs

Commercial banks stuck between a rock and a hard place as they fail to settle the payment of the Letter of Credits they authorize because of the foreign currency shortage.

It is a situation that has forced correspondent banks from Djibouti, Dubai and China to reconsider their agreements with Ethiopian banks.

The Banks’ forex resources depleted especially after the Central Bank introduced a new directive that limited forex retention from 50 to 20 percent for exporters, private and NGOs transfers.

The directive demands 70 percent of forex to be surrendered to the National Bank of Ethiopia (NBE), and only 10 percent to banks. It is a rule introduced as the government faces a surge in import bills because of the war in North Ethiopia and soar in price of strategic imports, including fertilizer and fuel.

“The shipment has already arrived in Ethiopia. But the payment has not been effected to our suppliers in China,” said an importer who imports finishing materials.

Over the past month, correspondent bank officials from Dubai, Djibouti and China travelled to Ethiopia to discuss the issue with Ethiopian banks and solve the problem in person. Ethiopian banks are also unable to pay freight charges to their Djiboutian counterpart, which is usually paid in USD.

 “Most banks approved LCs before the new directive reduced the retention ratio of exporters from 50 to 20 percent. Under the previous directive, banks were expecting more forex revenue, but the new directive slashed banks’ forex revenue. So, they cannot pay for the LCs they approved previously,” said Tewodros Shiferaw, a businessperson.

“The central bank is the source of the problem. The central bank should not ratify the new retention directive, before telling commercial banks to clear all the LCs they approved previously,” added Tewdros.

However, a president of one of the private banks, who spoke to The Reporter on conditions of anonymity, said the major source of the increasing defaults of import payments arise from commercial banks in Ethiopia.

 “Usually banks approve LCs based on hope without any forex in their accounts. They are making excessive commitments for importers and finally, the banks are failing to pay after shipment is delivered. Why does the bank approve the import document first without having the forex? This is because the banks have informal relations with importers,” the president said.

Currently, many local banks are losing their correspondent banks abroad. Frustrated by this, the central bank previously wrote a warning letter to the president of many private banks in the country.  

“Local banks must stop over-speculating. My bank approves LCs once in a month or two. Nobody forces me to approve LCs, if I have no forex. So I am not one of the defaulting banks,” concluded the president.

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