The World Bank and the Malawi Government have engaged in discussions on a project the multi-lateral lender will act as a guarantor to help ease the burden local firms are facing to import strategic commodities.
The $60 million (about K71 billion) De-risking Import of Strategic Commodities Project comes at a time local firms are facing challenges to import strategic commodities such as fuel, fertiliser and medical drugs due to the reduced access to foreign exchange, a situation that has made it difficult for them to access Letters of Credit (LoCs).
Both the World Bank and the Reserve Bank of Malawi (RBM), which will be recommending financial institutions to participate in the scheme, have confirmed the development.
In an e-mail response on Wednesday, RBM spokesperson Mark Lungu said the project comes at a time financial institutions are struggling to confirm LoCs, which is affecting importation of strategic commodities.
He said: “The World Bank wants to assist the country by offering a guarantee on importation of such commodities to reduce the perceived country risk.
“The role of the RBM will include recommending financial institutions to participate in the scheme, recommend products to be included and thereafter monitor performance of the scheme and report on the same.”
LoCs guarantee that the payment will be made by the issuing bank to the seller even if the buyer fails to honour payment. This provides the buyer an assurance that the seller will receive payment, thereby reducing the risk.
In its monthly economic report for September 2023, Nico Asset Managers Limited warned that challenges in accessing LoCs could impact importation of strategic commodities and the economy in general.
Reads the report in part: “The kwacha is expected to remain overvalued in 2023 owing to foreign currency shortages as a result of declining foreign currency reserves and limited letters of credit from international banks, which have been crucial in providing short-term liquidity support.”
An official from a fertiliser firm who did not want to be named said in an interview yesterday that their stock is held up at the port of Beira in Mozambique as they are having difficulties to accessg LoCs.
“The danger here is that we may have our stocks sold to other suppliers who have the money to pay or we may have the stock cleared but at a much later stage,” said the importer.
According to Nico Asset Managers, Malawi’s import bill is dominated by food, fertiliser and fuel whose prices rose sharply in the first quarter of 2023.
But the firm said in the 2024-27, the import bill is expected to decrease, owing to falling global commodity prices.
Malawi is reeling from forex shortages with RBM data indicating that the official forex reserves for August 2023 decreased to $239.56 million or 0.96 months of import cover from $267.91 million or 1.07 months of import cover in July 2023, which has affected critical imports