Imports slowed down in June after the Bangladesh Bank tightened the rules for opening LCs (Letters of Credit) for luxury items as part of its efforts to shore up foreign exchange reserves.
In June, 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.
Moreover, the value of LC opening was lower than that of settlements in June, which shows that imports are declining gradually.
The value of LCs opened in June were valued at $6.60 billion while the figure was always higher than the settlements in the last nine months, according to the central bank data.
In the first week of July, LC opening and settlement values both decreased month-on-month.
LC opening fell significantly after the Bangladesh Bank increased LC margin of luxury goods, said a senior executive at one of the largest private banks in the country.
On the condition of anonymity, he said his bank usually opens LCs worth $400 million-$450 million in a month, which came down to $200 million in June as imports of luxury goods have been stopped.
Moreover, banks are shying away from opening import LCs owing to dollar shortage, which also contributed to a decline in imports, he added.
Many banks are counting losses in import LC payments as they are having to buy dollars at Tk103 to Tk105 from money exchange houses but are selling to importers at lower or same prices due to the central bank's instruction to keep the LC rate low, he also said.
Although imports declined, the dollar crisis is still prevailing in the market due to a low inflow of foreign currency.
The dollar rate in the kerb market went up to Tk105 on Sunday when LC settlements for imports were Tk102-Tk103, according to banks.
The Bangladesh Bank continued its intervention by selling dollars and devaluing Taka to reduce volatility.
The Taka has lost its value by Tk5.70 in one and a half months since June.
The interbank exchange rate increased to Tk94.70 per dollar in July when it was Tk89 at the beginning of June.
The foreign exchange reserve experienced a sharp fall.
The country's reserves, which stood at $46.39 billion at the end of June 2021, came down to $39.67 billion on 20 July, according to Bangladesh Bank data.
The dollar crisis is not going to end soon as exporters see a sharp fall in orders from Europe and western countries amid rising global inflation.
Sharing experiences with The Business Standard, a garment accessories exporter said he has been experiencing a sharp decline in export orders in recent months.
Most garment factories are getting orders less than 30% of their capacity as record inflation rates across Europe and the US make consumers less willing to loosen their purse strings for new outfits and fashion accessories, according to industry insiders.
Remittance, another source of foreign currency, also remained downward, registering a 15% negative growth in the just-concluded fiscal year compared to the fiscal 2020-21.
Bangladesh's remittance earnings have been projected to increase by about 2% in 2022 by the World Bank in its recent Migration and Development Brief.
The report mentions that food inflation – driven by the ongoing Russia-Ukraine War – in the Gulf countries is inevitable and will dampen South Asian migrants' remitting potential in 2022 and 2023.