Import LC openings drop $14b in Jul-Feb

Infograph: TBS

The opening of Letters of Credit (LCs) for imports has dropped by around $14 billion, or 23.45%, year-on-year in the first eight months of the current fiscal year due to the central bank's restrictions as well as a decrease in export orders. 

Data from the Bangladesh Bank show that LCs worth $45.52 billion were opened during the July-February period, compared to $59.46 billion a year ago.

According to top officials at several banks and importers, the raising of LC margin to 100% – among a few other restrictions to minimise the dollar crisis – discouraged businesses from importing capital machinery and luxury goods. Additionally, because of shortages in dollar supply, banks also became cautious about opening LCs.

Besides, the central bank has directed banks to report imports worth more than $3 million before opening LCs. It has adopted the policy of verifying reported international prices of such products before approval. As a result, over-invoicing is also believed to have reduced somewhat, said bankers.

The Bangladesh Bank data shows that in terms of monetary value, the highest LCs were opened for industrial raw material imports. In July-February, $15.56 billion worth of LCs were opened in this segment, which is $6.68 billion or 30.05% less than the same period of the previous fiscal year.

A major part of these materials is imported as raw material for RMG exports. Businesses say they have reduced opening LCs for the import of these raw materials.

Shahidullah Azim, vice president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), told TBS, "The number of our orders have decreased. As a result, we do not need as much raw material as before. Sixty percent of our exports are to European countries. Buyers in these countries are not placing orders as before and are delaying the already placed orders or delaying payments.

"Consumers in those countries have cut back on apparel purchases, mainly due to inflation, which has resulted in fewer orders. Most of our factories have reduced overtime work. Exports last March fell year-on-year. I think this will continue for a few more months."

He, however, said the sector expects that orders will increase again from June-July.

According to central bank data, the opening of import LCs for capital machinery fell by about 54%, in terms of volume, to $2.53 billion.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told TBS, "We feel that traders are investing cautiously in the current scenario. Besides, banks are now doing more scrutiny when opening LCs for the import of capital machinery or luxury goods."

"Compared to these products, banks are giving more importance to opening LCs for the import of daily necessities. Also, due to the central bank's tightening of imports, LC opening has decreased," he added.

Along with the significant decrease in LC openings, LC settlements also dropped. The central bank data showed that payments stood at $52.02 billion in the July-February period, down 1.22% from the same period a year ago.

Seeking anonymity, the managing directors of several banks said their payment pressure has reduced significantly. However, they still have a large amount of dues for the import of fertiliser and fuel oil. These LCs were deferred. If these payments are made in the coming days, the total settlement amount will increase.

Selim RF Hussain, chairman of the Association of Bankers, Bangladesh (ABB), told TBS, "After speaking with banks, what I understand is that a reduction in LC openings may ease the pressure on the dollar in the coming days. I think we can see a positive impact on demand and supply of dollars by next June-July."

On April 17 of last year, the cash margin for LCs was initially widened to 25%, which was expanded in phases to 100% for 27 items. Besides, the central bank asked the banks to notify it in advance for LCs worth more than $3 million.

The country's forex reserve stood at around $44 billion in April 2022. The reserve fell to $31.24 billion on 5 April this year.