LC settlements in December lowest in 37 months

Infographics: TBS

The settlements of letters of credit (LCs) in December hit a 37-month low to $4.53 billion due to decrease in imports for the last several months.

According to central bank data, the previous lowest payments totalling $4.41 billion for LC settlements were made in November 2020.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Business Standard, "For several years, we have been averaging LC openings ranging from $5-5.5 billion. As a result, the pressure on our payments has significantly reduced compared to before. The decrease in LC settlements in December is primarily due to the lower pressure on payments during that month."

Pointing out that banks are now opening two types of LCs – sight and deferred – the senior banker said due to the good flow of remittances in the last two months, the liquidity situation of dollars in banks is favourable. "Hence, banks are now opening sight LCs along with deferred LCs."

For any opened sight LC, the payment must be made within one week. Banks opt for opening sight LCs when they have a good amount of dollar liquidity. On the other hand, deferred LCs provide a time window of 90-180 days for payment. In most cases, banks prefer to open deferred LCs for import transactions. In other words, a significant portion of the LCs, for which payments were made in December, were opened for import transactions that took place between July and September last year.

The LC opening in December dipped to a six-month low of $4.90 billion, also a 7% decline from November. In June, the LC opening figure was $4.87 billion.

In the July-November period, the opening of LCs for consumer goods decreased by 27% year-on-year. Besides, LC openings for capital machinery and intermediate goods registered a 17% year-on-year decrease during the period.

The CEOs of several top local private banks have indicated that although these banks currently do not face a dollar crisis as before, they are cautious about the security of LC payment before opening of fresh LCs. As a result, the opening of import LCs has decreased, leading to a reduced pressure on payments compared to before, said the bankers.

MDs of several private banks told TBS that although there is less dollar crisis in the banks compared to before, there is no surplus of dollars either. The banks are now keeping in mind the maturity of payment before opening the import LCs, they said. "As a result, the number of LC openings declined. The payment pressure is also decreasing compared to before," said a senior banker.

According to senior executives of several banks, traders were in a kind of uncertainty ahead of the national elections held early January. Due to these reasons, businesses were uncertain and hesitant, they said, adding, consequently, there was less enthusiasm for new investments. The senior bankers argued that due to these reasons, the opening of LCs for capital machinery decreased in December, just before the election.

Dollar crisis caused by the country's dwindling foreign currency reserves have forced businesses to significantly cut back on imports, they also said.

However, they commented that as the national elections ended, there might be a gradual increase in opening of LCs for capital machinery in the coming months.

According to central bank data, the dollar was sold at Tk96 from the reserve in October 2022. The dollar was last devalued in November 2023 to Tk110. Due to this devaluation of the currency, the cost of LC payments has gone up a lot. However, to manage the dollar, traders have to pay rates up to Tk122-123.