Rising dollar inflow leads to highest LC openings in 23 months

A surge in the inflow of remittances and export proceeds has led to an increase in dollar supply in commercial banks, resulting in the highest letter of credit (LC) openings in the last 23 months in May.

However, LC settlements during the same period experienced a slight decline compared to April.

Bangladesh Bank data shows in May, both the government and private commercial banks opened import LCs amounting to $6.83 billion.

The previous highest $7.02 billion worth of LCs were opened in June 2022. Since then, despite fluctuations, LC openings have generally followed a decreasing trend.

In April of the current year, LCs worth $5.68 billion were opened. LC openings in May increased by more than 20% compared to April. In comparison to the same period in 2023, LC openings in May increased by 19.5%.

According to several policy-setting officials from both government and private commercial banks, the inflow of dollars in May was higher compared to normal times. One significant reason cited was the receipt of remittances amounting to $2.25 billion in that month. The figure stands in contrast to an average monthly remittance inflow of less than $2 billion in the current fiscal year. 

Besides, despite a decrease in overall exports in May, there was a slight increase in export LCs in banks compared to previous times. Payments for previously made exports started arriving. With the initiation of the crawling peg in the exchange rate on 8 May, exporters are obtaining more favourable rates for dollars, prompting them to bring these back into the country.

Syed Mahbubur Rahman, managing director and chief executive officer, Mutual Trust Bank, told TBS, "Due to the recent activation of the interbank dollar market, which was previously inactive, banks are now able to collect dollars from there. As a result, even though some banks have experienced a decrease in remittances, they are gaining confidence in acquiring dollars from the interbank market. This assurance has enabled them to open more Import LCs."

The banks in the country are benefiting from the introduction of the crawling peg in the exchange rate system, he said.

"The crawling peg system has reduced the gap between the market rate and the dollar rate, giving customers more confidence to open LCs."

Mahbubur also said similar to industrial raw materials, the volume of LCs for intermediate goods imports also rose. He mentioned that this trend is positive for the economy.

The deputy managing director of a private commercial bank said due to a favourable inflow of dollars in May, commercial banks are increasing their LC openings. 

He mentioned that there has always been demand for LC openings, but previously they used to be more cautious in approving import LCs. For example, if someone applied for 5 LCs earlier, they might have approved only 2. However, in May, due to the good dollar flow, they on average approved 4 out of 5 LC applications.

In May, there was a slight increase in opening LCs for government imports, including jute oil and fertilisers. An official from a state-owned bank said one of the main reasons for this increase is the greater availability of foreign exchange, which facilitated more LC openings in bank accounts.

Ali Reza Iftekhar, managing director and chief executive officer of Eastern Bank told TBS, "Our liquidity situation in dollars has improved compared to before. Remittance flows are now steady. Moreover, our bank's export proceeds have also increased. Additionally, there are now dollar transactions happening in the interbank market, which has led to an increase in dollar inflows."

Transactions in this market were almost closed for a long time, he said, adding, "As a result, we have been able to increase our LC openings for imports. This trend will gradually move towards further improvement."

LC openings, however, may decrease slightly in June due to the banks' accounts being closed for a few days during Eid, said a senior official of a leading private bank.

"Besides, RMG and production-related houses remained closed for several days during Eid. As a result, there is reduced demand for raw materials. These factors contribute to a trend of decreased LC openings for imports during the Eid months."

In the first 11 months of the current fiscal year, a total of $63.02 billion worth of import LCs were opened — a slight year-on-year increase from $62.08 billion.

LC settlements in May decrease slightly

In May, banks settled import LC payments totalling $5.48 billion, which was 5% lower compared to April, central bank data shows.

A senior official of the central bank said currently, the pressure on deferred LC payments has reduced compared to before. "Banks have reduced opening deferred LCs to mitigate exchange rate risks. Consequently, the volume of payments has also decreased," he said.

In the first 11 months of the current fiscal year, LC settlements for imports decreased by 12% to $60.79 billion compared to the same period of the previous fiscal year.

A managing director of a private bank said due to lower LC openings in the past two years, pressure on payments reduced. Currently, banks are selling dollars at rates between Tk118.40 and Tk118.70 for LC settlements. On the other hand, they are collecting dollars from remittances at rates ranging from Tk117.80 to Tk118.30.