LC openings for capital machinery, intermediate goods drop in FY24
Dollar crisis and lower demand amid sluggish economy cited are reasons
The opening of import letters of credit (LCs) for products like capital machinery and intermediate goods decreased in the fiscal 2023-24 compared to the previous fiscal year, primarily due to lower demand driven by inflation and the ongoing dollar crisis.
According to central bank data, LCs worth $68.69 billion were opened in FY24, slightly higher than the previous fiscal year.
However, a sector-wise analysis of import figures shows that LC openings for consumer goods decreased by 12% in FY24, while capital machinery fell by 11%, intermediate goods by 18%, and petroleum by 4% compared to the previous fiscal year. On the other hand, imports of other products increased by 13%.
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Bankers and economists attribute the decline to the dollar crisis, which prevented traders from importing goods as per demand. Throughout the year, many businesspeople wanted to open LCs for various types of products, but it was not possible because banks did not have enough dollars on hand.
Additionally, the overall demand in the country decreased due to higher inflation over the past year. As a result, the import of capital machinery and intermediate goods decreased, alongside a reduction in production.
Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, told The Business Standard that import LC openings decreased due to the dollar crisis and reduced demand. "The decline in the import of capital machinery indicates less new investment in the country or business owners not expanding their operations. This decrease in investment has also led to insufficient job creation over the past year."
He further said, "Another reason for the decline in the import of intermediate goods is that producers have not been operating at full capacity. Consequently, fewer jobs were created, and many workers were laid off."
According to the central bank's detailed import data for July-May of FY24, among consumer goods, the import of edible oil and pulses decreased by more than 25%, while the import of sugar and spices increased slightly.
Among intermediate goods, the import of RMG products like raw cotton, textiles and articles thereof, staple fibre, and dyeing and tanning materials decreased, except for yarn. Additionally, the import of clinker, oil seeds, chemicals, pharmaceutical products, fertilisers, plastics and rubber articles thereof, and iron, steel, and other base metals also declined.
Senior officials from several banks mentioned that the central bank has been implementing various measures to reduce import costs, including requiring 100% margin on the opening of LCs and discouraging the import of luxury goods for the last one and a half years to conserve the forex reserve.
As of 31 July, the forex reserve stood at $20.48 billion according to BPM6, down from $23.26 billion in the same period last year.
Data from the central bank shows that LC settlements totalled $66.05 billion in FY24, down from $72 billion in FY23. This indicates a decrease of about 8.29% in LC settlements compared to the previous fiscal year.
A senior official from the central bank noted that the pressure of deferred LC payments has reduced compared to earlier periods, as banks have reduced the opening of deferred LCs to avoid exchange rate risks. Consequently, LC payments have also decreased, he said.
A managing director of a private bank reported that banks are currently selling dollars at a rate of Tk121-122 to settle LCs, while remittance dollars are being collected at a maximum rate of Tk119.50.
