Central bank meets exporters today on local LC payment in taka

The central bank will meet garment exporters to determine whether it is possible to open and settle local back-to-back letters of credit (LCs) in local currency amid a dollar crunch following Bangladesh's forex reserves fall, according to officials and businessmen. 

Leaders of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) and the Bangladesh Textile Mills Association (BTMA) will participate in the meeting at the Bangladesh Bank on Wednesday.

Currently, local back-to-back LC opening and settlement requires payment in dollars. However, the BKMEA in early November proposed to the central bank that it be allowed to open and settle LC payments in taka as 80% of the knitters source raw materials locally.

In a letter to the central bank, the BKMEA said LC opening and payment settlement in Bangladeshi taka instead of dollars at the local stage would help ease the greenback shortage to some extent.

The BKMEA mentioned that exporters are incurring losses in LC opening and settlement due to the Tk7-8 dollar-taka conversion gap. "Exporters will get relief from the currency exchange gaps if the demand for LC payment in taka is met." 

Based on that letter, the central bank has called the exporters to take a decision in this regard. 

A top central bank official told The Business Standard on Tuesday that local LC opening and settlement in taka would certainly take some pressure off the dollar crunch in the local banking channels.   

"The central bank is considering this proposal. It will be finalised after the meeting," said the official. 

BGMEA President Faruque Hassan said a large chunk of the raw materials the association uses are sourced from the local market. 

"We have to open and pay back-to-back LCs in dollars even for those products. But this could be done in taka and we want the central bank to allow us to do so," he told The Business Standard on Tuesday.

Mentioning that some services like embroidery do not need dollar payment, the exporters' leader said they, however, are now paying it in dollars. "In these cases, LC opening and settlement is possible in taka."   

Several business leaders preferring anonymity told TBS that what the BGMEA and the BKMEA are seeking will be positive for the country too, given the ongoing dollar crunch.

But the Bangladesh Textile Mills Association (BTMA) disagreed on the proposed switch. According to BTMA leaders, they have to import the raw materials of products to be sold to apparel-makers and knitters under local LCs.

For example, they said cotton needs to be imported for the locally manufactured yarn sold under local LCs. If local LCs are allowed in taka, textile-makers say they will have to manage dollars separately from banks to import cotton. Currently, they do not have to face the dollar hassle as they receive payments in dollars for local LCs.

Mohammad Hatem, executive president of the BKMEA, said that local LC opening and settlement in dollars and the conversion gap both hamper their businesses and also put pressure on the banking channel.     

He, however, agrees that opening and settlement of all local LCs in taka is not rational, as raw materials for many of the fashion inputs are imported. "But we have to spend more dollars to buy locally manufactured items with imported inputs than what they actually cost for the import."  

Estahak Ahmed Shaikat, director of the BTMA, said the association is already facing problems in LC opening for cotton imports owing to the dollar crunch. 

"If the taka is allowed for local back-to-back LC payment, then banks certainly will exploit the dollar shortage on us – which eventually will hurt export," he told The Business Standard.