Import LC opening in June lowest in FY23

The opening of import letters of credit (LCs) saw a decrease in the last month of the just-ended fiscal year, which bankers said occurred due to various restrictions imposed by the central bank and the dollar crisis.

According to the central bank data, import LCs worth $4.75 billion were opened in June, which was the lowest in June, and a 44% decrease in LC opening compared to the same month of FY22. 

Import LCs worth about $5.84 billion were opened in May and LCs worth $4.85 billion were opened last April, data shows.

A total of $94.27 billion worth of LCs were opened in the fiscal year 2021-22, which dropped to $69.36 billion in the fiscal year 2022-23. That is, LC openings decreased by about $25 billion or 27% year-on-year.

Bankers said it has become difficult for traders to open LCs to import goods due to various restrictions of the central bank. Traders are discouraged from opening LCs as there is a 100% margin on imports of certain products.

However, a senior central bank official, wishing not to be named, told The Business Standard, "Money laundering through over-invoicing has been reduced due to increased vigilance in the opening of import LCs. As a result, the total LC amount also decreased."

He also pointed out that total imported goods have not decreased much in FY23 compared to FY22. 

When asked about the reason for the low LC opening in June, Emranul Huq, managing director & CEO of Dhaka Bank, said, "There is less pressure to open LCs in the last month of a financial year. One of the reasons for this is that traders want to see if they get any benefits in the new fiscal year budget."

Senior officials of several private banks, on condition of anonymity, told The Business Standard that traders are interested in opening Sight LC, which is payable immediately (within five to ten days) after the seller meets the requirements of LC.

If Sight LC is opened, the price of the product has to be paid in a very short period, the officials said, adding that as the dollar price continues to rise, traders fear that it may rise further in the coming days. 

In the case of Deferred LC, the dollar repayment period is at least six months. Banks are more interested in opening Deferred LCs than opening Sight LCs as they are experiencing a shortage of dollars, officials said.

Stating that businessmen are not opening Deferred LC unless it is necessary, the managing director of a bank, seeking anonymity, said, "The Secured Overnight Financing Rate (SOFR), known as the interest rate of the dollar, has crossed 5%. It was once less than 1%. When Deferred LC is opened, the interest payment is to be made in dollars. Rising interest cost is also a reason for the decline in LC opening."

Association of Bankers Bangladesh (ABB) Chairman and Brac Bank MD and CEO Selim RF Hussain said, "Deferred payment pressure in the banking sector has eased somewhat. Our forex situation is better now. However, the dollar crisis is not completely over yet. We hope that the situation will improve in the coming days."

However, to deal with the dollar crisis, the central bank continued to sell dollars from the reserve. A record $13.58 billion was sold from reserves in FY23. Because of this, the forex reserve is also decreasing. The country's reserves stood at $30.02 billion as of July 9.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, told TBS, "A decrease in LC openings means that the country's economy is now going into a slow-down. Imports of raw materials and capital machinery are decreasing at a significant rate. That is, our investment will decrease and fewer new jobs will be created."

Referring to the decrease in the price of products in the world market, Mansur said the prices of many products including fuel oil and soybeans have decreased in the international market. As a result, our cost to import the same amount of products is decreasing.