Import dipped $21 billion in 2023. With what impact?

Imports dropped by $21 billion last year due to various restrictions imposed by the central bank to tackle dollar shortage, leading to a slump in investment which eventually slowed down the country's economic growth.

The country's total import declined by 24.32% to $65.39 billion by the end of 2023 from $86.40 billion in the previous year, according to Bangladesh Bank data. 

The sharp reduction has been primarily caused by the reduced imports of capital machinery and industrial raw materials. Businesses have been struggling to expand amidst a severe dollar crisis and constraints on opening Letters of Credit (LCs) from the central bank.

The import of capital machinery and industrial raw materials declined by 33% or $12 billion last year which was more than half of the total declined amount of import, central bank data shows. 

Although drastic cuts in imports slowed down dollar price fluctuation and turned the current account balance from deficit to surplus, the country's economy started to feel the pinch from slowed GDP (Gross Domestic Product) growth.

Bangladesh's GDP grew by 5.78% in FY23, slowest in 13 years, except the pandemic year of FY20, according to the Bangladesh Bureau of Statistics (BBS). The growth rate was above 7% in FY22. 

In the first quarter of FY24, GDP growth posted at 6.07%, slower than the 6.24% growth posted in the last quarter of FY23. The first quarter growth was much lower from 8.76% posted in the same period of the FY23.

The slow economic growth already posed a threat to banking sector performance as private sector business operations have been weakening making them unable to continue their debt payment services. 

Businesses suffer

Superex Leather, one of the top finished leather exporters, became irregular in loan payment due to fund crisis and inadequate LC support from the lender amid dollar shortage. 

Mobinul Motin Shawon, company representative of Superex, told The Business Standard that they started getting a huge number of orders after achieving prestigious LWG (Leather Working Group) certification six months back. 

LWG is a global multi-stakeholder community committed to building a sustainable future with responsible leather. Superex is one among only six Bangladeshi companies that are LWG members.

Despite having export orders, Superex could not go for full-fledged production due to shortage of raw materials, said Shawon. 

The company needs to import chemicals amounting to nearly Tk20 crore monthly, but it's unable to open Letters of Credit (LCs) due to a shortage of dollars. Consequently, the company is operating at only 10% of its production capacity.

Shawon said the company has a bonded licence but it has been purchasing raw materials from the local market costing double and paying high duty. As a result, the company now can not continue its regular debt service with the bank with loans of above Tk700 crore. 

Superex, with over 700 workers, is now trying to arrange funds from foreign banks to fulfil their LC requirements to keep business running, he added. 

Md Khorshed Alam, chairman of Little Star Spinning Mills, explained his business challenges to TBS, saying, "I requested my bank to open an LC for cellulose fibres, a raw material for textiles, worth over $1 lakh from India and China three weeks ago." 

However, the bank had not confirmed it yet due to the dollar crisis, said Alam, also a director of the Bangladesh Textile Mills Association.  

He also said the existing raw materials will run out in three days and he may have to buy them from the local market at a higher cost to keep yarn production going.

Impact on banks 

Describing the impact of reduction in imports, Syed Mahbubur Rahman, managing director of Mutual Trust bank, said businesses are not going for expansion which is causing a fall in capital machinery import. 

"Many businesses are scaling back production because they can't import enough raw materials, which will likely result in reduced employment as factories operating at 40% to 50% less capacity will need to cut costs, he added.

Rahman said banks are also facing significant forced loans as businesses struggle to make LC payments amid low production and consumption amidst a high inflation. 

He said dollar liquidity improved after restricting imports but still, banks could not provide adequate LC facilities to businesses.  

However, Rahman remains optimistic citing increasing monthly remittances and record exports in January which could improve dollar liquidity. 

He said there are signs of stability in the forex market with a reduction in dollar price fluctuations and a surplus in the current account balance, alongside a narrowing deficit in the financial account.

Macroeconomic stabilisation is more important now than economic growth, he said. "When the market stabilises, the economy will take off again."

Macroeconomy and external account

Dollar price for imports has remained stable at Tk120 to Tk 122 for the past two months, despite the official rate being Tk110, according to market insiders.

According to Bangladesh Bank data, industrial raw material imports decreased by $10.5 billion to $21 billion in 2023. 

The industrial sector's quarterly growth fell to 9.67% in the first quarter of the current fiscal, compared to 11.41% in the previous quarter and 7.17% a year earlier, as per Bangladesh Bureau of Statistics.

The country's banking sector felt the pinch of economic slowdown as banks experienced a steep rise in default loans by Tk25,000 crore in 2023.

However, there has been a significant improvement in the country's external position in the first six months of the current fiscal year with the current account balance turning into a surplus from deficit. 

This improvement is attributed to controlled imports providing considerable relief to the central bank.

Central bank data show the current account balance turned into a surplus of $2 billion in July-December of FY24, overcoming a deficit of nearly $5 billion in the same period of FY23. 

A senior economist of the Bangladesh Bank said the reduction in imports has mainly contributed to slowing down the economy. However, the central bank will continue to curb import until inflation cools down, he said. 

However, there is a concern that controlling imports may backfire on inflation as less production will restrict the supply chain leading to increased prices, he added. 

The overall inflation again saw a spike in January reaching 9.86% following a drop in December last year, according to BBS data.

In December, the overall inflation stood at 9.41%, marking an eight-month low. The inflation rate has consistently remained above 9% since March last year, with November registering at 9.49%.