LC settlements surge by $4.5b in Jul-Nov

Letter of credit (LC) settlements increased by $4.5 billion or 14.84% year-on-year in the first five months of the current fiscal year due to a surge in the country's imports of capital machinery, petroleum and industrial raw materials.

In the July-November period, the LC settlements stood at $34.82 billion, up from $30.31 billion in the same period of the previous fiscal year, according to the central bank data.

Bankers say despite consistent steps by the central bank to curb imports, LC settlements have grown substantially because Bangladesh is now paying the import bills for LCs that were opened before the imposition of the restrictions.

They added that the price rise of essential commodities in the global market was another reason behind the growing trend of LC settlements in recent months.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said, "LC settlements increased due to a surge in earlier deferred payments by banks and a rise in product prices. As a result, pressure has also been created on our foreign exchange reserves."

The country's gross foreign exchange reserves stood at $33.98 billion on 6 December, but the usable reserves were $26.24 billion, as per the central bank's data. In August of last year, gross foreign exchange reserves reached a record high of $48 billion.

Bangladesh's reserves continue to fall due to the dollar selling spree of the central bank. During July through December, the regulator sold $6.6 billion to banks to settle import payments of industrial raw materials and essential commodities.

On the other hand, the opening of LCs did not come down as expected despite austerity measures taken by the government and the central bank.

Meanwhile, the country's import LC opening has decreased for seven consecutive months due to various restrictions imposed to preserve the country's foreign exchange reserves.

In November this year, traders opened LCs to import goods worth $4.02 billion, which was more than $7 billion in the same period last year.

Besides, the LC opening in the first five months of the last financial year was $35.42 billion. In the same period of the current fiscal year, LC openings stood at $29.50 billion. Accordingly, LC openings decreased by $5.93 billion or 16.73%.

The treasury head of a private bank said that at the beginning of June, big traders could open LCs for imports, but small companies were having trouble opening LCs. Now even big corporations are facing problems opening LCs as most of the banks are in a dollar crunch. Because of that, the number of LC openings has decreased.

Seeking anonymity, the managing director of a first-generation private bank told TBS that about 20 banks in the country have negative net foreign currency open positions.

"So, I'm personally thinking about saving dollars rather than opening LCs with my bank," he added.

The country's remittances declined by around 15% in the last financial year. Although the remittance inflows rose slightly in the first two months of the current fiscal year, there was a sharp decline in the September-November period.

Salehuddin Ahmed, former governor of the Bangladesh Bank, said, "The Bangladesh Bank should have imposed conditions on imports earlier. Our trade deficit was the highest in the last fiscal year. During that time, many unnecessary products were imported."

He said imports have increased by about 35% in the last year, but there are no signs that industrial productivity has increased as a result of that. Through these imports, a lot of money has been laundered abroad. In order to increase production, the country has to increase imports related to productive sectors. Otherwise, inflation will increase.