LC openings hit 5-year low in June amid falling investment, consumption

Infograph: TBS

Highlights:

• June LC openings hit lowest level in nearly five years
• LC settlements also declined, lowest since November 2020
• Private investment slowdown blamed for falling import demand
• Capital machinery, raw material imports fell over 25%
• Low imports caused dollar to depreciate, prompting bank intervention
• Economists urge swift action to revive business confidence, investment

Amid declining private investment, persistent inflation-wage growth mismatch, and overall weakening consumption, Bangladesh recorded its lowest monthly import Letter of Credit (LC) openings in 58 months this June, according to data from the central bank.

Import LC settlements have also dropped significantly, reaching the lowest level in nearly four and a half years.

Bankers and economists warn that June's LC opening volumes were even lower than during the Covid-19 pandemic – a red flag for any import-dependent economy.

According to Bangladesh Bank data, LC openings in June fell to $4.14 billion, down 24.42% from $5.47 billion in the same month last fiscal year.

An analysis of central bank data shows that LC openings steadily declined throughout the second half of FY25, bottoming out in June. The last time LC openings dropped below this level was in August 2020, when they stood at $3.7 billion.

Stakeholders say imports fell in early 2020 due to the nationwide lockdown and economic disruptions following the detection of Bangladesh's first Covid-19 case in March of that year. In contrast, the sharp decline in import LC openings this past June is being attributed to a sustained slowdown in private investment.

Speaking to The Business Standard, Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, said, "Many importers have significantly reduced their imports, citing lower demand for their products. On top of that, the implementation rate of the government's Annual Development Programme (ADP) is also quite low."

"For an import-dependent country like ours, such a sharp fall in imports is disappointing. It will ultimately affect government revenue and banks' overall income," he added.

Data from the central bank shows that total imports in FY25 (July-June) stood at around $69 billion, up just 0.18% or $122 million from the previous fiscal year. However, the growth was not across the board.

Import LCs for capital machinery, essential for investment, fell by over 25% year-on-year. Import LCs for intermediate goods, petroleum, and industrial raw materials also declined over the same period – a trend seen as a sign of weakening economic momentum.

June LC settlements declined

According to data from the Bangladesh Bank, LC settlements totalled $4.59 billion in June, down 14% from $5.33 billion in the same month a year ago.

The last time monthly LC settlements were lower was in November 2020, during the peak of the Covid-19 pandemic, when they stood at $4.41 billion.

However, on a fiscal year basis, LC settlements have increased. In FY25, Bangladesh settled $69.46 billion in import LCs, up 4.18% from $66.07 billion in FY24.

Syed Mahbubur Rahman said, "The government must act quickly to revive imports. This includes engaging directly with businesses, removing bottlenecks, and prioritising the early conclusion of national elections to restore confidence and momentum."

Low imports drove dollar price drop

Syed Mahbubur Rahman said the sharp drop in imports during June led to increased dollar liquidity in the market, which in turn caused the exchange rate to fall.

An analysis of data from the central bank and commercial banks shows that the dollar started to depreciate from the end of the first week of July. Within just one week, the rate fell by about Tk3, hitting Tk120. This prompted the Bangladesh Bank to intervene by purchasing dollars through auctions – for the first time in history – on 13 July.

On that day, the central bank bought $173 million at Tk121.50 per dollar, even though commercial banks had offered to sell at Tk120-Tk120.50. By offering a higher floor price, the central bank signalled its intent to stabilise the market.

Just two days later, on 15 July, it bought another $373 million at the same rate, followed by a smaller purchase of $10 million in a subsequent auction. These moves reversed the downward trend, pushing the dollar rate up again.

As of yesterday, remittance and interbank market rates ranged between Tk122.50 and Tk122.83.

Commenting on the lack of demand for import LCs, another bank CEO said, "Investment is virtually stagnant right now. Without investment, there's little need for capital machinery or industrial raw materials. Most of the current imports are essential consumer goods, which tend to remain at a fairly constant level."