LC openings rise in August from July, settlement falls

In August, LC openings rose nearly 12% from July, totalling $5.59 billion, according to data from Bangladesh Bank, though the openings still fell 15% from last year. On a gloomier note, the settlements fell in August both on monthly and year-on-year basis.

July witnessed LC openings amounting to $4.96 billion, as per central bank data.

When asked about the year-on-year decline in LC openings, a central bank official explained that they are closely monitoring import LCs exceeding $3 million. This heightened scrutiny has led to a decrease in incidence of over-invoicing, contributing to the reduction in LC openings.

A managing director of a private bank said, "We have significantly reduced the opening of LCs for capital machinery compared with the past. We exercise caution and open them only when it is absolutely necessary."

He said one reason for this is the need to establish a payment schedule when opening an LC. "Our dollar inflow is not robust, and overall, LC openings are declining," he said.

Highlighting the negative repercussions of reduced capital machinery imports on investment and employment, the banker expressed concern over the current situation. He added that despite a favourable Nostro position, the challenging dollar liquidity situation hampers the initiation of new LCs.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, acknowledged the reduction in LC openings for luxury goods. He stressed the need for a careful review of the situation to facilitate as many LCs as possible, noting that banks tend to favour deferred LCs due to the scarcity of sufficient dollars.

Meanwhile, LC settlements for imports have also experienced over 35% decline in August compared to the corresponding month last year. From $7.69 billion in LC payments in August 2022, the figure fell to $5.38 billion in the same month this year. In July, payments totaled approximately $6 billion.

Anis A Khan, former chairman of the Association of Bankers, Bangladesh (ABB), explained that the reduction in LC openings naturally results in decreased settlements. He attributed this trend to constraints on increasing payments within the banking channel, causing many LCs to be deferred.

Khan emphasised the importance of a market-based exchange rate for the dollar to boost incoming dollar flows, suggesting that a market-based rate could initially range from Tk120-130 and eventually stabilise. He further noted that non-market rates for the dollar were impacting both LC openings and settlements.

The managing director of another bank said that the payment has decreased due to restrictions on opening LCs. As a result, the country has reduced trade deficit. Still, the country faces a widening gap in balance of payments as remittances fell by over 21% in August, he noted.

Amidst these challenges, Bangladesh's foreign exchange reserves have dipped below $23 billion, with the central bank selling $2.3 billion from reserves in the first two months of the current fiscal year. These measures have apparently not been sufficient to resolve the ongoing dollar crisis.