LC openings, settlements dip in January YoY

In the first month of 2025, both the openings and settlements of import letters of credit (LCs) decreased compared to the same month of the previous year due to a decline in import demand and the pressure of overdue LC payments, among other factors.

Bangladesh Bank data shows a 5.4% year-on-year decrease in import LCs opened in January, totalling $6.13 billion.

When asked why the openings of import LCs declined in January, the managing directors and deputy managing directors of at least three private banks told TBS that banks are experiencing lower demand for opening import LCs compared to before. One major reason for this is the overall decline in demand due to inflation, particularly a reduced demand for materials in the private sector.

However, several weaker banks have almost no capacity to open import LCs. State-owned banks are under pressure to clear overdue payments, so they are not opening new import LCs. Additionally, some banks that do have the capacity to open LCs are exercising caution in doing so.

The central bank data shows that import LCs worth $41 billion were opened during the first seven months of FY25 (July-January), a 2.63% ($1 billion) increase compared to the same period of the previous fiscal year.

Sohail RK Hussain, president and managing director of Bank Asia, said, "So far, we are seeing a somewhat lower demand from customers for opening import LCs. In particular, the demand for opening LCs for essential commodities for Ramadan appears to be lower compared to last year."

However, he said, import LCs for Ramadan goods are still being opened in the current month of February. Importers are also reducing imports due to lower market demand, he added.

An analysis of sector-wise import LC openings shows that in the first seven months of the current fiscal year (July–January), the biggest decline was in capital machinery imports, which dropped by 34%.

During the period, LCs worth only $1 billion were opened for capital machinery. The second-largest decline was in petroleum imports, where LC openings fell by 9.73%.  

Apart from industrial raw materials and consumer goods, imports of all other categories declined compared to the previous fiscal year.

Syed Mahbubur Rahman, managing director and chief executive officer of Mutual Trust Bank, explained, "Capital machinery imports have been declining for quite some time. This continued decline indicates that industries are not focusing on increasing production." 

He added, "As a result, this trend is impacting the creation of new employment opportunities. The lower import of machinery suggests that industries are not expanding their capacity."

Commenting that a prolonged low level of capital machinery imports slows down the economy, the experienced banker said that law and order as well as the external balance have somewhat improved in recent months. "However, due to overall instability, businesses are less inclined to make new investments."

Import LCs settlements fall 1% in January

According to the central bank data, import LC settlements in January totalled $5.93 billion, down slightly from approximately $6 billion in the same period a year ago.

However, on a fiscal year basis, import LC settlements have increased. In the first seven months of FY25, import LC payments amounted to $40.25 billion, compared to $39.43 billion during the same period in the previous fiscal year. 

A senior official of the central bank mentioned that over the past two years, the openings of import LCs have consistently decreased. As a result, LC payments have also declined in the same trend, he said.

An analysis of sector-wise import LC payments shows that the largest decline, 27%, occurred in payments for capital machinery imports. The second-largest decrease, 13%, was observed in payments for intermediate goods imports. 

Apart from industrial raw materials, the import payments for most other products decreased during the July-January period of the fiscal year.

Commenting on the reduced pressure of payments in private banks due to a decrease in deferred LCs, the managing director of a private bank said, "We are now opening LCs with payment schedules, which has reduced the pressure of deferred payments."

Commenting on the reduced pressure of deferred LCs for most products, including essential Ramadan goods, Sohail RK Hussain said, "Private banks have been managing dollars by scheduling payments well in advance, so currently there is not much pressure on payments."