LC opening up 25% in May amid dollar dearth

Infographic: TBS

The opening and settlement of import letters of credit (LCs) increased by about 25% and 10%, respectively, in May compared to April of the current fiscal year amid the ongoing dollar crisis.

According to Bangladesh Bank data, new LCs worth about $5.33 billion were opened in May, which is $1.03 billion more than in April. At the same time, LCs worth $4.69 billion were settled by banks in May, which was a 10% increase over the previous month.

Bankers are now worried about the dollar flow in the system as the demand for imports may increase further in June centring Eid-ul-Azha.

The managing director of a Sharia-based bank, on the condition of anonymity, told The Business Standard (TBS), "In April, banks and small traders have reduced the LC opening for importing various types of consumer goods. Because that month, some banks were warned by the central bank as they bought remittance dollars at high prices. That warning lowered imports."

LC opening reached a 32-month low in April due to a combination of restrictions implemented by the central bank and the ongoing dollar crisis. Additionally, LC settlement reached a 21-month low in that month. 

Import LCs worth only $4.30 billion were opened last April while settlement amounted to $4.69 billion.

"LC opening was supposed to increase in May and June because of Eid. Besides, the central bank eased conditional penalties on banks that bought dollars at excessive prices, which is another reason for the spike in imports," the official added.

During the period of July to April in the current financial year, a total of $56.36 billion worth of import letters of credit were opened, marking a decline of approximately 27% compared to the same period in the previous financial year. LC settlements in the first 10 months of the fiscal year amounted to $62.40 billion, reflecting a nearly 8% year-on-year decrease.

Several importers told TBS that banks are not opening LCs as per the demand even though all the conditions of the central bank including keeping the 100% LC margin are met. Production of various goods is suffering due to inadequate imports of raw materials.

Central bank reports show a 46% drop in LC openings for industrial machinery like computers or motorcycles. LC openings for industrial raw materials like textile fabrics and chemicals fell by 32%. LC openings for intermediate goods like cement and scrap vessels fell by 31%, and LC openings for consumer goods like rice and wheat fell by 18%.

When asked, Zakir Hossain Chowdhury, the acting spokesperson of the Bangladesh Bank, told TBS that the central bank has no restrictions on LC opening. However, LCs worth over $3 million are reported to the central bank. Imports of products rise and fall sometimes. LC opening will increase more ahead of Eid and the dollar flow in banks is now at a normal level.

An MD of a private bank, seeking anonymity, told TBS, "Moody's rating has recently given a negative outlook to several banks, including my bank, which will increase our import costs. We are now extending the settlement time by deferring many of our payments but it will be challenging for the banks to pay import bills."

"The flow of remittances and export proceeds is not increasing. Besides, the loans that were earlier available from foreign sources will now be hard to get due to Moody's negative rating. It will be a big headache for the banks," he said.

"The central bank should stop the import of luxury goods by all means and reduce the money flow through hundi — an illegal cross-border money-transfer system. The use of hundi cannot be reduced by increasing the exchange rate because if the dollar rate is increased in the country, the hundi dealers abroad will also increase the rate. They buy dollars with illegal money," the MD added.

The central bank sold around $12.67 billion to banks in the 10 months (July-April) of the 2022-23 fiscal year. The country's reserves stood at $29.91 billion at the end of 31 May, which was $42.20 billion at the corresponding time of the previous fiscal.

Zahid Hussain, a former lead economist at the World Bank's Dhaka office, told TBS, "The low import of capital machinery and industrial raw materials has a direct impact on the country's manufacturing sector. When manufacturing companies are unable to operate at their full capacity, it leads to ripple effects on other sectors, including transportation and marketing at the consumer level."

"Furthermore, government revenue falls. Because government revenue from import duties, taxes and VAT falls. Investments are also hampered. All of these again trigger inflation, which is caused by a reduced supply of goods. This inflation is not imported but the making of our own."