Imports drop 18.19% with falling raw materials, machinery in H1 

TBS Illustration

Due to a significant decline in imports of capital machinery and raw materials by industrial enterprises, the country's import payments fell by 18.19% in the first half of the fiscal year 2023-24.

The settlement of letters of credit (LCs), generally known as actual imports, stood at $33,683.51 million in the July-December period compared to $41,175.28 million in the same period a year earlier, Bangladesh Bank data shows.

In the July-December period, Bangladesh's overall import orders also declined by 5.33% year-on-year, the data shows.

Bankers say that import restrictions have been in place for the past two years amid dwindling foreign exchange reserves. At the same time, banks also faced a shortage of dollars. As a result, the overall amount of LCs has decreased, leading to a decrease in settlements at present.

According to experts, while reducing imports may reduce pressure on the dollar, it also has a downside. If imports decrease, it will also have an impact on the production of industrial factories, meaning this could also have an impact on exports, they say.

The central bank data shows that imports of industrial raw materials, capital machinery, and consumer goods fell sharply in the first six months of the current fiscal year 2024.

During the period, the settlement of industrial raw materials was $10.54 billion, down 31.21% from the previous fiscal year. At the same time, the opening of LCs for this product fell by 10%.

In addition, the settlements of consumer goods and capital machinery in the first six months of FY24 were $3.22 billion and $1.43 billion, respectively. However, these settlements fell by 22% and 27%, respectively, from the previous period.

To maintain the country's foreign exchange reserves, import restrictions have been in place for all types of goods except essential goods and fuel. Even though imports have declined, reserves are declining significantly due to the lack of growth in export earnings and remittance flows.

According to the central bank data, the country's reserves stood at $20.03 billion as of January 17, a notably low from $32.49 billion at the same time in 2023.

Emranul Huq, managing director and CEO of Dhaka Bank, told The Business Standard that import settlements are gradually declining due to a decline in LC settlements in the past two years. The amount of settlements is expected to decline further in the coming months, he said.

He also said that the decline in LCs is having a ripple effect on the market as well. "Because about 60% of our exports have to be done through back-to-back LCs. This could disrupt the production and exports of industrial factories."

'Banks are opening LCs with great caution'

Emranul Huq also said that there has been a significant amount of supplier credit in the 2022 fiscal year. "The payment for these was due a year later. However, due to the outflow of dollars being higher than the inflow of dollars during this payment, a major dollar crisis has arisen."

Currently, banks are opening LCs with great caution, the Dhaka Bank MD said, adding that they are also paying more attention to paying off previous payments.

The managing director of another private bank told TBS that they are opening fewer deferred LCs. "Banks are opening sight LCs in line with the amount of dollar flow they have. As a result, the amount of new LCs opened has decreased significantly."

He also said that it is quite challenging to revive the economy now. "The rate of dollar inflow is not increasing due to the rate of remittance and export earnings. On the other hand, if imports continue to decline, investment in the country's private sector will decline, and there is a possibility of many jobs being lost."

For any opened sight LC, the payment must be made within one week. Banks opt for opening sight LCs when they have a good amount of dollar liquidity. On the other hand, deferred LCs provide a time window of 90-180 days for payment. In most cases, banks prefer to open deferred LCs for import transactions.

Currently, banks are buying one dollar for Tk109.50 for export earnings and remittances. However, many banks have gone outside of this rate and collected dollars for remittances at Tk120-24, bankers say. In addition, banks are also charging outside of the announced rate for opening import LCs, they say.

The central bank has recently set policies aimed at tackling challenges affecting the economy. The BB said that the main objective of its strategic directives in the half-yearly monetary policy, spanning from January to June 2024, is centred on upholding a vigilant, hawkish approach to monetary policy until inflation rates are effectively reined into a desired level.

The Bangladesh Bank said it finds itself at a critical juncture as the economy navigates through the latter half of the fiscal year, facing a multifaceted economic landscape.

The central bank said it has increased its policy rate by 25 basis points to 8% from 7.75% to deal with the demand-side pressures while ensuring the required flow of funds to the priority and production sectors to promote supply-side activities.

This was the ninth straight rate hike in the past 20 months as consumer prices have remained at an elevated level.

Bangladesh's inflation was at 9.41% last December, way above the central bank's target of 6% for the current fiscal year from July 2023 to June 2024.