The opening of letters of credit (LCs) for imports has increased by 14.34 per cent in October 2023 compared to the same month of the previous year.
LCs involving $5.42 billion were opened in October 2023 which was $4.74 billion in October last year. However, LC openings rose over the last three months. According to the Bangladesh Bank data, LCs involving $5.59 billion were opened in August while $5.23 billion in September this year.
On condition of anonymity, a senior official of the central bank told The Business Post that there were two key reasons behind an increase in LC openings.
“Banks are opening government LCs, especially for fertiliser and fuel. But LCs opened for fertiliser import has increased in the last three months,” he added.
He further said as farmers will cultivate Boro paddy during the January–February period of next year, the demand for fertiliser will increase at that time. “So, the government is increasing LC openings for fertiliser import.”
“Another reason for an increase in the opening of LCs in October is import of expensive capital machinery. Probably, the opening of the LC under the Export Credit Agency (ECA) has increased. It could be $300–400 million per LC, which is a big amount compared to other LC.”
An export credit agency offers trade finance and other services to facilitate domestic companies' international exports. Most countries have ECAs that provide loans, loan guarantees and insurance to help eliminate uncertainty of exporting to other countries.
Another senior official of the central bank told The Business Post, “Commercial banks are facing problems due to USD crisis. Every day, these banks want USD from the central bank. The Bangladesh Bank supports commercial banks to facilitate opening of LCs. That's why the central bank sold USD to the commercial banks every month. The central bank sold $4.53 billion to commercial banks in July–October of FY24.”
A senior official of the central bank said, "The amount of the LC opening would have increased in the last three months, because banks are opening only government LCs. On the other hand, there are many importers that can't open their private LCs due to USD crisis. Commercial banks are now denying opening of private LCs as well.”
Ahsan H Mansur, Executive Director of Policy Research Institute of Bangladesh (PRI), told The Business Post that the government imported fertiliser because the farmers will need it by January during Boro season. As well, farmers had faced a shortage of fertiliser last year.
He also said, “The country needs USD through the banking channel. Otherwise banks would not be able to open LCs, which is not good sign for the economy in the long term.”
A treasury head on condition of anonymity said, "Banks are facing USD shortage. We have been facing pressure from managing director to collect the USD. Now, we are opening the government LC.”
The central bank data shows that banks opened LCs worth $6.51 billion in September 2022. After that, LC opening has decreased gradually.
Now banks, especially the state-run ones, are getting USD support from BB for settling import payments of Bangladesh Petroleum Corporation, Bangladesh Agricultural Development Corporation and Bangladesh Chemical Industries Corporation, among other government agencies.
The country’s forex reserves continued to fall since August 2021 because of the central bank’s USD selling spree. Foreign reserves stood at $20.66 billion in November 1 this year as per International Monetary Fund’s (IMF) method.
