Bangladesh’s central bank has announced new letter of credit (LC) requirements for local banks, amid rising concern over the impact of ballooning import costs on the Asian nation’s foreign exchange reserves.
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.
The earlier memo put the transaction threshold at more than US$5mn, excluding those involving purchases made by the government.
In both letters, lenders had been told to circulate the information to all their domestic branches, “effective immediately”.
Zaidi Sattar, chairman of Dhaka-based think tank Policy Research Institute (PRI), tells GTR a recent surge in imports has led to excess demand for dollars and “uncertainty” in the local FX market.
Following the outbreak of the Ukraine crisis, prices for energy goods and food items, such as wheat and rice, soared to levels not seen in decades. Commodity prices have tapered slightly since March, but remain elevated.
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, Sattar tells GTR. In recent months, the taka has devalued, rising from roughly 85 against the dollar to 95 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.
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%.
Calls for IMF support
For now, there is little sign that Bangladesh will face a foreign currency crunch and experts suggest the central bank measures are pre-emptive.
Bangladesh’s FX reserves of about US$40bn put the country in a “comfortable” position and able to cover all of its necessary imports for about six months, Sattar says.
He tells GTR that the garment manufacturing sector, which accounts for the bulk of the country’s export sales, is still capable of sourcing the hard currency it needs to buy inputs from abroad.
“I have not heard of any dollar liquidity problems for the garment industry. Roughly half of the imports needed by the sector are tied to export proceeds anyway. Right now, about 55% of garment exports are done through back-to-back LCs.”
But there are signs of trouble on the horizon for garment manufacturers, with an anticipated global economic slowdown set to trigger a drop in clothing sales in Europe and the US.
The Bangladeshi garment industry makes up more than 10% of the country’s gross domestic product and employs nearly 4.5 million people, yet is now struggling to deal with costs for energy and other inputs.
“Orders have slowed down,” Faruque Hassan, president of the Bangladesh Garment Manufacturers and Exporters Association, told Reuters last month.
“Western countries are raising bank interest rates. That’s why people are giving priority to food and mortgages. Demand for clothing is less. This will hamper our export.”
Bangladesh recently joined Sri Lanka and Pakistan in requesting a loan from the International Monetary Fund (IMF), though government officials have reportedly said the country does not need financing, and will only accept a deal on favourable terms.
According to Bloomberg, Bangladesh is also seeking US$1bn-worth of funding from each of the World Bank and the Asian Development Bank, amid efforts to bolster its foreign exchange reserves.
In recent weeks, the government has moved to limit energy use by adopting a country-wide policy of “load shedding”, temporarily reducing the supply of electricity to certain areas to balance supply and demand.
Bloomberg reported this week that a global gas crunch means Bangladesh is potentially facing three years of rolling power cuts, with the country struggling to source long-term supply of natural gas and finding the spot market too expensive.
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