16/10/2025
UNDERSTANDING HOW LETTERS OF CREDIT OPERATE – WHY APM’S PLAN IS PRACTICAL AND STRATEGIC
By Hon. Alfred Gangata, Minister of State, Republic of Malawi
The recent debate surrounding President Arthur Peter Mutharika’s (APM) proposed use of a US$500 million Letter of Credit (LC) to address Malawi’s fuel shortage has sparked questions from some quarters. One such question is: “Where will the forex come from if our reserves are depleted?”
Allow me to provide clarity on this matter both as a businessman and as someone who understands how financial systems operate.
1. What a Letter of Credit Really Does
A Letter of Credit is a bank’s guarantee to pay a foreign supplier once all agreed trade conditions are met. Importantly, an LC does not mean an immediate cash payment. It is a deferred payment instrument backed by creditworthiness, collateral, or sovereign guarantee.
This means that if a government can demonstrate credible repayment ability through projected export earnings, trade finance lines, or balance of payments support — reputable banks can issue an LC even before the forex physically enters the country.
The critical factor, therefore, is not simply “having forex,” but restoring confidence in Malawi’s credit standing and securing international financial instruments that guarantee payment.
2. APM’s Real Strategy: Restoring Confidence and Access to Credit
When President Mutharika mentioned the US$500 million LC, he was referring to structured trade financing based on Malawi’s sovereign potential and renewed partnerships — not on depleting the current reserves.
Under the new administration:
• The Ministry of Finance and the Reserve Bank of Malawi are negotiating trade finance lines with reputable international banks and long-term oil suppliers.
• Development partners and friendly governments are being re-engaged to reopen credit facilities that were frozen due to the previous government’s governance and corruption challenges.
• The Energy and Finance Ministries are exploring supplier credit arrangements, where fuel is supplied under LCs backed by sovereign guarantees and repaid gradually through fuel levies and export earnings.
This is how a US$500 million LC becomes achievable not through printing forex, but by restoring global trust and leveraging Malawi’s financial integrity.
3. How Forex Will Flow Again Under APM
President Mutharika understands that forex shortages are a symptom, not the cause of Malawi’s economic struggle. His broader recovery plan tackles the underlying issues:
• Reviving the export base (tobacco, tea, sugar, and minerals) through stabilization measures and export incentives.
• Reforming the mining sector to ensure more forex retention from mining operations.
• Re-engaging international financial institutions such as the IMF and AfDB for balance of payment support, anchored in fiscal discipline.
• Combating corruption and forex externalization, ensuring that forex circulates within the formal banking system.
• Encouraging diaspora remittances and investment by rebuilding trust and stability.
As these measures take effect, forex availability will improve, and banks will more easily honor LCs ensuring consistent fuel supply and economic stability.
4. Why This Approach Makes Sense
Fuel shortages suffocate the economy they halt production, disrupt transport, and increase the cost of living. Waiting for reserves to “build up” before importing fuel would only deepen the crisis.
The LC approach is therefore a bridge solution a credible, internationally recognized financial tool that allows government to secure fuel supply now while structural reforms take effect. It’s a smart economic response to a liquidity problem.
5. The Bottom Line
Critics are correct that LCs depend on forex, but they overlook the fact that LCs rely more on trust and structured credit than on immediate cash reserves.
President Mutharika’s plan is grounded in solid international trade principles a realistic and responsible approach to restoring essential imports while rebuilding the country’s capacity to generate forex sustainably.
I am not an economist by profession, but as a businessman and now policymaker, I understand how the economy works.
So, to my colleague Mr. Mkaka and friends in the MCP let us not mislead the nation. Your administration had five full years to address these same challenges, yet failed to grasp the fundamentals of economic management.
Now, under President Mutharika’s leadership, Malawians can expect a government that acts decisively, understands finance, and delivers practical solutions.
Hon. Alfred Gangata
Minister of State, Republic of Malawi
