Import LCs drop by 13% in July-August FY25 due to political instability, lack of investment

Infographic: TBS

In the first two months of FY25, both import-related letter of credit (LC) openings and settlements declined by around 13% due to various reasons, including political instability and stagnant investment.

According to data from the central bank, import LCs worth $10.03 billion were opened during July-August, a drop of nearly $1.5 billion compared to the same period last fiscal year.

When asked why, a deputy managing director of a private bank said banks have seen a reduced demand for LCs mainly due to the recent unrest in the country.

He explained, "In July, hundreds of people were killed in the anti-discrimination student movement, which led to significant unrest throughout much of the month, severely impacting business activities. 

"Additionally, a 5-day internet blockage and bank closures during the month disrupted imports. Transport of both import and export goods was also affected. As a result, both the opening and settlement of import LCs decreased in July."

The banker further said, "After the formation of the new government in August, businesses remained hesitant to invest." 

He said several factories were vandalised and looted during the month, and the garment industry was hit by labour unrest, affecting production. This has left many businesses feeling insecure about making new investments. 

He warned that if this trend continues, exports could also be affected alongside imports.

An analysis of sector-wise LC openings shows the most significant decline was in capital machinery imports, which fell by 44% in the last two months, followed by petroleum imports dropping by 36%.

Only $286 million in LCs were opened in July-August. Except for industrial raw materials, imports across all other sectors decreased compared to the previous fiscal year.

On the issue, Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, told The Business Standard, "As an import-dependent country, we should be importing at least $5-6 billion each month. Given the size of our economy, we need even more imports. The current decline in imports is not a good sign for us."

Commenting that the decline in capital machinery imports indicates a drop in investment in the country, the banker said, "The decrease in machinery imports shows that industries are not expanding their capacity. Many import-dependent factories are shut down, which likely explains the drop in LC openings."

"However, we need to closely monitor the trend in import LC openings over the coming months," he added.

Import LCs settlement falls 13.08%

Central bank data shows that LC settlements during the first two months of FY25 totaled $10.34 billion, down from $11.90 billion in the same period last year. 

A senior official from the central bank attributed this to a consistent decline in LC openings over the past two years, which has naturally led to a drop in LC payments.

Sector-wise analysis of LC payments reveals that capital machinery imports saw the most significant drop, falling by 33%. Consumer goods imports also decreased by 32%. Payments for petroleum, intermediate goods, and other imports similarly declined in July-August.

Talking to the TBS on the issue, a managing director of a private bank said that deferred LCs are now less common, which has eased the pressure on private banks for payments. 

He said, "We are now scheduling payments with LC openings, reducing the burden of deferred payments."

However, state-owned banks are facing significant pressure due to overdue payments, he added. 

He said these banks handle a large portion of the government's import expenses and currently have over $1.5 billion in overdue payments. 

Due to a shortage of dollars, these payments could not be made on time, forcing some banks to purchase remittance dollars at slightly higher rates, he explained.

According to banks, they are offering around Tk120 per dollar for remittance purchases, with import payment rates ranging between Tk120.30 and Tk120.50.