Less developed and lower middle income countries across the world are reporting disruptions in letter of credit (L/C) flows as they struggle to cope with tough economic conditions and foreign currency shortages.

Difficulties have been most noticeable in recent months in smaller South Asian economies, but larger countries in the region as well as countries in Africa are now reporting problems writing L/C business as usual.

But in some countries, policies to cope with poor economic conditions and foreign currency shortages may be boosting L/C business.

South East Asia

In May, Bangladesh followed Nepal's move to restrict the use of L/Cs for non-essential imports while banks in Sri Lanka have been unable to issue L/Cs since last year (DC World News, 20 May 2022).

Laos is in dire economic straits. On the brink of sovereign bankruptcy, the state cannot meet its debt obligations. With just US$1.2 billion in foreign reserves, Laos needs pay US$1.3 billion a year until 2025 to service its debt, much of which is owed to neighbouring China.

Pakistan

In Pakistan, some European and Asian banks are already starting to refuse the discounting of payments on L/Cs while the government has restricted the issue of L/Cs to automotive and technology customers.

One of the country's largest shipbreakers says it is missing out on lucrative work because it has been unable to obtain an L/C to purchase a very large crude carrier that the owner wants scrap.

Africa

Nigerian manufacturers can no longer obtain all the L/Cs they need to import raw materials required to maintain production due to foreign exchange shortages.

They are lobbying the Central Bank of Nigeria to provide manufacturers preferential access to foreign exchange. It is currently allocated to both importers of finished goods and raw materials importers at the same rate in the same window, which the manufacturers say is a disincentive to the productive sector.

Innovative solutions

Zimbabwe and Zambia are amongst African countries that have experienced difficulties obtaining L/Cs since before the pandemic, although some innovative solutions to difficulties are being found.

Mining and commodity trading giant Glencore for example has helped to fund Zambia's Mopani Copper Mines by providing L/Cs for the state-owned miner on two or three occasions when it had insufficient funds to buy copper concentrate.

L/C boost

Some policies introduced to cope with difficult economic conditions and foreign currency shortages may actually boost L/C business.

The Central Bank of Egypt earlier this year issued a notice to the country's banks ordering them to arrange only L/C transactions for importers.

Under previous rules, importers could buy on cash-against-documents terms that do not require traders to tie up their bank lines of credit (DC World News, 23 February 2022).

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.