LC margin: Bangladesh‍‍`s machinery import falls record low

Bangladesh‍‍`s capital machinery and raw materials imports fell to record low after Bangladesh Bank announced the new letter of credit (LC) requirements for local banks.

According to the data released by the central bank, the value of the new LCs opened for capital machinery imports fell 65 percent to $399.7 million year-on-year in the first two months of FY23.

The total value of new LCs opened between July and August was $12.40 billion, compared to $12.36 billion a year earlier.

In a circular issued on July 28, Bangladesh Bank instructed financial institutions to provide a minimum of 24 hours’ notice when opening LCs for import transactions worth US$3mn or more, building on a previous rule announced in mid-July.

Bangladesh Bank slapped the new rules amid rising concern over the impact of ballooning import costs on the Asian nation’s foreign exchange reserves.

As a result, the opening of LCs for the major commodity imports has seen a stark decline.

This situation will cast a long standing impact on the country’s industrial arena, observed experts.

Distinguished Fellow at the Centre for Policy Dialogue (CPD) Dr Mustafizur Rahman said Even though the new margin has been slapped to mitigate the crisis, the crisis is still prevailing.

"The policymakers should have considered the long-lasting impact of the decision. Capital machinery import fall could impact the country’s export sector too. As a result, Bangladesh‍‍`s economy may fall prey to a vested quarter."

Stressing on tackling money laundering, he further said: "This crisis would not go until we managed to control money laundering." 

The recent surge in imports has led to excess demand for dollars and “uncertainty” in the local FX  market.

Bangladeshi government data show foreign exchange reserves have fallen to US$39.5bn, as of July 27, from about US$45.7bn a year earlier, while the trade deficit leapt to a record US$33.3bn in the fiscal year ended June 2022.

In a bid to conserve hard cash, the central bank has stopped using its own US dollars to manage the floating rate, as it had previously done, said BB officials.

In recent months, the taka has devalued, rising from roughly 85 against the dollar to 104 as of press time.

Bangladesh Bank has also moved to curb hard currency demand through administrative measures. 

In addition to the new LC rules, it has been discouraging importers from using LCs for non-essential purchases.

Faruq Hasan, president of Bangladesh Garment Manufacturers and Exporters Association, told the report: "In such situation, the importers will count loses by purchasing capital machinery in a high rate."

In May, the bank imposed a minimum 50% cash margin on LCs for non-essential imports, up from the 25% set in April. The LC margin for sedan cars, high‑end motor vehicles, as well as electronic and electrical home appliances is even higher, having been increased from 25 to 75%.

Mutual Trust Bank Managing Director Syed Mahbubur Rahman said: "Remittance is the main source of foreign finance in Bangladesh. Our bank gets some 70 percent of foreign finance as remittance."

"As the remittance flow decreased abnormally nowadays, the authorities have taken the decision to tightening the LC rules," he added.