Dollar rally puts some banks in trouble to settle LCs

A severe shortage of dollars has forced some banks in Bangladesh to delay payments to foreign suppliers against import LCs (letters of credit), damaging the reputation of the local banking industry in the global arena and putting the country at risk of losing its credit rating.

The cash US dollar rate climbed to an all-time high of Tk112 on Tuesday while the import LC rate surged to Tk105, adding to price pressures and high inflation rate.

The inflation rate in the country hit an nine-year high of 7.56% in June this year. Industry experts have said the unusual rise in dollar price will fuel inflation further.

The inter-bank exchange set by the Bangladesh Bank verbally remained ineffective due to the large difference from the market rate. The inter-bank exchange rate was Tk94.70 on the day.

Some large private commercial lenders have stopped opening import LCs without the permission of managing directors while some banks are refusing the import of sight LCs–a document that verifies the payment of goods or services, payable once it is presented along with the necessary documents-- amid the dollar crisis.   

The Bangladesh Bank is not responding to private banks' requests for supplying dollars. The central bank is providing a limited amount of dollars only to state banks for fertiliser and fuel imports.

On Tuesday, the central bank released $50 million dollars for fuel imports, according to sources within the Bangladesh Bank.   

Overdue LC payments

As of 19 July, the Bangladesh Petroleum Corporation (BPC) has overdue LC payments to the tune of $150 million with the state-owned Janata, Sonali, and Agrani banks against petroleum products.

The banks could not make payments to the suppliers even 10-15 days after the settlement dates, according to the BPC.

Some fertiliser importers are also going through the same experience of payment delay, causing troubles to suppliers.

A fertiliser importer told The Business Standard that he had six overdue LCs as banks could not make the payments on time, which has made the suppliers reluctant to continue business.

Banks are obliged to make payments to foreign banks against LCs within a certain period and their failure to comply with the deadlines causes a reputation loss for the country.

Payment history is one of the major factors that are taken into consideration in determining the credit risk rating for a country by global rating agencies.

Downgrading the country's rating will increase import costs for banks as they will have to take LC confirmations through third parties by paying commission.

Contacted, CEO and MD of Agrani Bank Mohammad Shams-Ul Islam told TBS that they were making payments to foreign suppliers part by part due to dollar shortages.

He also said even though payment delay is an unusual case, payment failure is now a global phenomenon in light of the dollar crisis.  

In view of the current context, suppliers are agreeing to take partial payments and that is why payment delays will not cause a loss of credit rating, he mentioned.

He also claimed that the Bangladesh Bank strengthened the dollar supply after the new governor took office, which would enable them to make LC payments on time.

Even though importers are facing troubles because of banks delaying import payments, the Bangladesh Bank has not yet received any official complaints in this regard.

While speaking to TBS, a senior executive of the central bank who works with the import-related department, said he heard about a few cases of payment delay but did not get any official complaint.

Moni Lal Das, general manager (Finance) at the BPC, told TBS that they are facing troubles with suppliers due to payment delays.

Citing an example, he said they have one lot of LC worth $41 million with Sonali Bank. The payment date expired on 14 July, but the bank could not make the payment even five days after the deadline.

Another senior executive of the BPC on condition of anonymity told TBS that the dollar supply of the Bangladesh Bank was not enough because the LC value has doubled due to fuel price hikes in the global market.

He said that the value per LC now stands at $40 million to $45 million, which was $20 million prior to the present dollar crisis.

In a recent meeting with government high-ups on the energy crisis, the representative of the Bangladesh Bank explained that they could not provide sufficient dollars to the energy sector as they have an obligation to pay for other sectors such as fertiliser, medicine, and industrial raw materials.

Moreover, they have to maintain a certain level of foreign currency reserves, he told TBS referring to the meeting discussion.

High volatility in dollar market

A shortage of dollars has created panic in the kerb market, taking the prices of the greenback to a record high on Tuesday.

Industry insiders said sellers are holding dollars assuming that the price will go up further.

Commercial banks are not selling cash dollars to their customers either.

Meanwhile, many people could not buy dollars for various purposes, including treatment, in the open market on Tuesday.

A relative of a cancer patient told TBS they need $5,000 dollars to go to Singapore for the treatment, but could not manage the amount even after contacting various banks.

He then contacted several money changers in Motijheel. One of them said he had $1,000 and demanded Tk112 per dollar. He returned home empty handed.

The LC rate also went up to Tk105 per dollar on Tuesday because of the pressure of LC opened at the beginning of the year.

Explaining import pressure, a senior executive of a private bank said many banks opened a huge amount of LCs at the beginning of the year as there was not much of a crisis of dollars at that time.

One large private bank opened LCs worth $1.5 billion in January, he said.

Banks are now under pressure of payments against those LCs, which is intensifying the dollar crisis, he added.

Nevertheless, LC openings declined sharply this month as many banks are refusing to open sight LCs.

One large bank on Tuesday decided that they will not open any LC without permission of the managing director, which means they will approve LCs on a case by case basis, he said.

He said many banks are running negative in the net opening position of foreign currency when the standard is to be zero.

Net opening position of foreign currency is the balance of inflow and outflow of dollars.

He said the dollar market will cool down by next month as imports have started to slow down and remittance inflow is increasing.

Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue, told TBS that importers buying dollars at higher prices will affect inflation in three ways – firstly, on direct commodity products, which is imported inflation; secondly, prices of the products that are produced locally with imported raw materials will also increase; and thirdly, prices of local products made using locally sourced raw materials will also be affected partially because of various reasons including a hike in transportation costs.

He also said soaring inflation in the international market will increase pressure on the domestic market.

But if inflation comes down in the international market, then the dollar market will stabilise and inflation will also decrease, he mentioned, adding, "So far, we have not seen prices go down in the international market, except for edible oil. Recently, exports from Ukraine have been reopened, while a few of the sanctions imposed on Russia have been lifted. If the situation returns to a more normal position, inflation will come down."

Imports slowed down in June after the Bangladesh Bank tightened the rules for opening LCs for luxury items as part of its efforts to shore up foreign exchange reserves.

Last month, LC settlements declined by over 6% month-on-month and the trend continued in July, according to data from the central bank.

The LC settlement value was $6.79 billion in June – the lowest in the past nine months.

Remittance inflow, however, shows some hope as Bangladesh has received $1,642.75 million ($1.64 billion) inward remittance till 21 July, thanks to Eid-ul-Azha when Bangladeshi migrants sent more money home for their families to celebrate the festivals, according to data from Bangladesh Bank.

 When the dollar rally will stop

The dollar gained more than 10% in this year alone and its value is at a 20-year high against a basket of its peers, making trade costlier worldwide. 

Import bills are getting bigger and many banks are failing to settle LC payments for want of sufficient dollars in Bangladesh as in neighbouring countries. 

The Indian rupee, the third-worst performer in Asia in the past month, declined to a lifetime low of more than 80 per dollar, adding to worries of imported inflation as well as an external deficit blowout, reports Bloomberg. 

The Pakistani rupee continued to lose its value, reaching near an all-time low of 233 against the dollar in the interbank market. Bankers allege many exporters are not bringing export proceeds home, making the situation worse further. 

Apart from hurting economies that rely more on imports of energy and foods and weakening their currencies further, the dollar rally is also threatening US companies' profit from global businesses too.

A strong dollar can be a headwind for U.S. companies as it makes exporters' products less competitive abroad and hurts multinationals that need to convert their foreign profits back into the U.S. currency, says a Reuters report.

Each percentage point of year-on-year increase in the U.S. Dollar Index translates to a 0.5 percentage point hit to S&P 500 earnings growth, analysts at MorganStanley estimated.

The unabated dollar rise is feared to shave off 5% earnings growth or roughly $100 billion of S&P 500 companies this year, according to FactSet. 

Though it remains unclear how long the dollar rally will continue, Goldman Sachs's market research group co-head Kamakshya Trivedi believes the dollar will trade high a bit more, but "the largest part of the dollar move may well be behind us."