South Sudan Leaking Letter of Credit
Garang Atem Ayiik, Juba, South Sudan
June 26, 2015 (SSB) — There are risks between the seller and buyer; if an importer pays before delivery of goods or services, there is an exposure of non-delivery by exporter, and if exporter delivers before payment, there is an exposure of non-payment by the buyer/importer.
In respond to this exposure, the International Chamber of Commerce in 1933 developed rules; and issuance of letter of credits under the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits. These rules have been updated and standardized as time goes and utilized by bankers and commercial parties many countries around the world.
Letter of credit is a contractual agreement between the importer’s bank, on behave of his client, guaranteeing the exporter’s bank that payment will be effected once exporter deliver goods or services in accordance with agreed term.
Exporter obligation is to deliver goods and services to the importer, and obtains documentation as an evidence of fulfillment for his obligation in accordance with the terms and conditions of letter of credit.
Once this is done, exporter submits this documentation to his bank to claim payment from importer’s bank. Buyer, through his bank become liable once goods or services have been delivered. If buyer fails to fulfill his contractual obligation, his bank settle obligation on his behave. With this, international trade has a tool to insulate against risks.
These introductory paragraphs showed that letter of credit aims to reduce the exposure to a buyer or seller with commercial banks playing a facilitating role.
South Sudan as an importing economy, relies on imports for all its economic needs. To support import of essentials commodities like fuel, food, medicines, construction materials and others, in 2012, the government introduced a line of letter of credit with Qatar National Bank to facilitate access to dollars for importation of these essentials goods and services.
South Sudan ‘foreign currency letter of credit’ was to serve a different purpose, to facilitate dollars access for imports. There was need to domesticate this letter of credit to meet macroeconomic objectives that it deems to serve and ensure controls are in place to protect it from misuse.
There are three issues that needs to be addressed. One, ensures that those who access dollars at official rate, delivers goods and services commensurate with the amounts given to them to reduce leakages in allocated goods and services to be imported.
Second, ensure fairness in access to benefit of the letter of credit to corporate entities by deploying some competitive mechanisms; and third, institutionalized management of letter of credit.
In a normal letter of credit, if someone wants to import a car for instance, there got to be two banks involved, importer’s bank and exporter’s bank both acting as control to ensure agreed trade terms and obligations are meet.
South Sudan foreign currency letter of credit don’t involve use of dual banks model and hence creating easy access to letters of credit that are not necessary for imports. Whether this was due to lack of knowledge or outright intentional mischief, need to be corrected.
Dollar has a facilitating role and its access therefore needs to be transparent. The model that South Sudan employed involved some sectorial allocations. This could be taken further by ensuring that within a sector, companies’ competes for allocations and some metric for rewarding are developed. For instance, companies in constructions could be divided into Large and Small and Medium, these divisions are already provided by South Sudan Taxation Act 2012.
Possible criteria for awards are corporate tax paid in previous periods; number of employees; PIT paid in previous; and performance on previous allocations. This thinking of creating criteria for allocations is just to ensure that there are guidelines for allocations. Without parameters for allocations, decision-makers act in self-interest – Public policies must not allowed arbitrary.
To ensure proper controls, duals banks must be involved, custom officers at point of entry must validate delivery, and accountability must be built into the process of managing the allocations. Tough penalties for any mischief and cheating must be created.
During the ongoing debate on letter of credit saga, to what extent information relating to allocations of dollars can be disclosed by LC issuing entities emerged as an issue. The Companies Act requires that companies publish their financial statements in newspapers. If these allocations were meant to be for imports, then Companies Act requires full disclosure of revenues in statement of comprehensive incomes.
Furthermore, allocations are from public monies and hence by extension, public should know if their monies allocated to companies are being use for the right purpose.
These last two paragraphs suggest that those asking to do business with public funds must comply with regulatory regimes and must be prepare to work in an open. Some form of providing information to the public might be useful.
On the going investigation of LC by NLA and Audit Chamber, from the public domain, the LC thing was not right since day one and I am sure selfishness allow it to run for long.
The greatest limitation to getting to the end of LC investigations will be lack of data. We must as nation pursue improving record keeping and data management for accountability and policy analysis.
Audit and investigations will reveal legal beneficiaries but real rent-seekers might not be revealed as there is no paper trail.
For instance, it is possible to push for LC to XY Ltd for import of machinery. To secure LC, XY Ltd requires connection from LC issuing government entity. This connection that benefits with a rent doesn’t appear in any documentation. In short, the really beneficiaries will be safe only those managing the process and legal beneficiaries will be exposed.
As we continue to experiment with audit and investigations, the past has shown audits and investigations don’t bear fruits in South Sudan. This notwithstanding, immediate improvements need to be done to LC management. Otherwise, moving it to the banks, will only change the beneficiaries but the mess is still in-tact.
Proper controls will be key to a useful LC model. Otherwise, LC will continue to be the tool for foreign investors to repatriate profits; use by well-connected to trade in black market and a tool for encouraging rent-seeking. Its management needs to be improve today.
Garang Atem Ayiik is an independent economic commentator who lives in South Sudan.
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