Dollar crisis intensifies LC payment pressure as taka weakens

Dollar crisis is haunting the local market again, pressuring banks to resort to exchange houses for dollars at high rates to settle Letters of Credits (LCs) opened a few months ago.

The rising demand for the US currency has led to an increase in its prices at the exchange houses with the taka plunging at 98.50 to 99 against a dollar on Thursday, up from Tk97-97.50 on the previous day, bank officials said.

According to sources, commercial banks had demanded $500 million from the central bank last Wednesday. But the central bank released only $204 million, of which the state-owned Agrani Bank received $54 million and other state-owned banks received the remaining $150 million.

However, the private banks failed to secure dollars from the central bank on the day, forcing them to resort to exchange houses to collect the US currency.

Fear for LC payments

Meanwhile, the dollar shortage is causing several banks to miss LC payments for the last few days, sources said.

Bank officials said although it is not completely new for banks to miss LC payment deadlines, the shortage in dollars is certainly making things worse. Bankers blame the Bangladesh Bank's changing policy for the crisis.

The opening of import LCs has decreased due to the different policies taken by the Bangladesh Bank, the head of the treasury department of one of the top private banks in the country said on condition of anonymity.

But, he told The Business Standard, "Even though the rate of opening LCs has come down now, the payment pressure is coming on the LCs that were opened a few months ago."

Explaining the urgency for dollars, the senior banker said, "Every bank has to pay the import LC within a stipulated time, otherwise they will be marked as defaulters. In that case, foreign banks will no longer be able to rely on us to open LCs. This might result in an increase in confirmation charges.

"If we fall into such a situation because of the dollar crisis, it will not be pleasant in any way."

Banks usually have to pay a certain LC confirmation charge on the total LC value based on a country's foreign trade capacity and guarantee of payment.

For banks operating in Bangladesh, the charge is 2% to 3% of the total LC value, which is a lot higher than the neighbouring countries. For instance, Indian banks have to pay a charge of only 0.50% to 0.75%. In Pakistan, a relatively weaker economy, the charge is between 1.25% and 1.75%.

In the meantime, the central bank is trying to control the crisis by selling dollars from the reserves. So far, it has sold more than $7 billion to commercial banks in the current fiscal year.

Currently, the central bank continues to provide an average of $100 million as foreign currency support to banks every day, resulting in a decline in the reserves which have fallen to $42 billion from its height of 48 billion last August.

The price of the US currency has surged in the country's kerb market as well. Over the last few days, the market has been trading dollars at a rate of around Tk98. On Thursday, the rate increased to Tk98.30 - Tk98.50, while cash dollars were being sold at rates of Tk98 - Tk98.10.