Mendo's Generator Import: Payment Risk and the Balance of Payments
A trader in Douala, Etablissements Mendo, wants to import 200 portable electric generators from a manufacturer in Guangzhou at USD 85 each. The supplier will ship CIF Douala. Mendo has only FCFA 8,000,000 in working capital, while the shipment is valued at about FCFA 10,200,000 before customs duties and taxes. The supplier insists on either full payment in advance or an irrevocable documentary credit confirmed by a Douala bank. Mendo's bank is willing to open the credit only if he deposits a 30% cash margin and provides a proforma invoice, insurance certificate and import licence where required. Local competitors sell similar generators at FCFA 75,000 each. Customs clearance will add about 35% of the CIF value in duties, VAT and handling. Mendo expects to sell all 200 units within four months. The CFA franc is pegged to the euro, but the invoice is in US dollars.
1. Compare payment in advance with a documentary credit for Mendo. Which should he choose, and why?
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Payment in advance: Mendo would need about FCFA 10.2m (200 × USD 85 × approx. FCFA 600/USD). He has only FCFA 8m, so he would have to borrow or abandon the order. He would also bear the full risk of non-delivery or poor quality, because the supplier has his money before shipment.
Documentary credit: the bank pays only against compliant documents. Mendo needs a 30% margin: 30% × FCFA 10.2m = FCFA 3.06m. Customs and clearance at 35% of CIF = about FCFA 3.57m. Total cash needed before selling = about FCFA 6.63m, plus bank charges. That fits within his FCFA 8m, leaving a small buffer.
The documentary credit is therefore the better choice. It gives the supplier assurance of payment and gives Mendo control because the bank checks the documents before paying. It does not guarantee quality, so Mendo should add a pre-shipment inspection and agree the specification in the proforma invoice. He should also confirm the bank's fees and the exchange rate clause, because the invoice is in US dollars even though the CFA franc is pegged to the euro.
2. Explain the role of four documents Mendo will need and how they protect him.
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- Proforma invoice: the supplier's offer showing quantity, unit price, specification and delivery term. It lets Mendo check the order and gives the bank the basis for the credit.
- Commercial invoice: the final claim for payment. It should match the proforma and the credit terms; any discrepancy can allow the bank to refuse payment.
- Bill of lading: the transport document and document of title. It shows that the goods were shipped and allows Mendo or his agent to claim them at Douala. A 'clean' bill indicates no visible damage at loading.
- Insurance certificate: evidence that the goods are covered during the sea voyage under the CIF term. It protects Mendo if the generators are lost or damaged in transit.
He will also need a packing list, certificate of origin and customs declaration. The documents protect him only if they are consistent: the description, quantity and value must agree across the credit, invoice and bill of lading. Mendo should instruct the bank on the exact documents required before the credit is opened.
3. Explain how this transaction will affect Cameroon's balance of trade and balance of payments, and state one policy measure that could reduce the deficit.
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The import is recorded as a debit in the balance of trade, because goods are entering Cameroon and foreign exchange is leaving. The CIF value of about FCFA 10.2m is the starting point; freight and insurance may also be recorded in the services or income accounts. In the balance of payments, the payment appears as a debit on the current account and a corresponding reduction in foreign reserves or an increase in foreign liabilities. There is no matching export in this transaction, so the trade balance worsens.
The effect is not automatically bad if the generators are used productively, for example by small businesses that otherwise lack power. But the immediate foreign-exchange outflow is a cost. A policy measure to reduce the deficit could be import substitution: encourage local assembly or manufacture of generators through tax incentives, or raise awareness of locally produced alternatives. Alternatively, the government could promote exports of processed cocoa or other value-added goods so that export earnings cover the import bill. A tariff alone would raise revenue but might also raise the price to consumers, so it should be assessed together with the local supply response.