Letter of credit (LC) settlements – also known as actual import payment – dropped 16.31 per cent in FY23 when compared year-on-year, mainly because of austerity measures implemented by the government and Bangladesh Bank to save forex reserves.
Settlement of LCs stood at $70.03 billion in FY23, down from $83.68 billion a year ago, show latest Bangladesh Bank data.
Central bank officials say LC settlements fell in the last FY mainly due to a series of initiatives taken by the government and the Bangladesh Bank for reducing growing import payments.
At the beginning of FY23, the regulator imposed a 100 per cent cash margin for opening LCs on a number of luxury goods, including cars, electronics and gold.
Later on July 28, the central bank asked banks to inform it 24 hours in advance before opening any LC worth $3 million or above, as part of its measure to save forex reserves. These austerity measures however have done little to check the falling trend of foreign exchange reserves.
Bangladesh’s forex reserves stood at $29.68 billion on July 26, down from $39.61 billion at the same period of 2022.
When calculated under the balance of payments and international investment position manual (BPM6) of the IMF, Bangladesh’s forex reserves was at $23.30 billion in the same day.
The central bank injected $7.62 billion from its reserves to banks in FY22. It also injected around $14 billion to banks from reserves in FY23.
Now banks – especially the state-run ones – are getting USD support from the Bangladesh Bank 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 continue to fall since August 2021 because of the central bank’s USD selling spree. Not only the settlement of LCs, the opening of LCs too came down to $69.36 billion at the end of FY23, compared to $94.26 billion recorded in the previous FY.
Commenting on the issue, Managing Director and CEO of Dhaka Bank Emranul Huq said, “Both the openings and settlements of LCs have fallen in the last FY due to austerity measures taken by the central bank and this was a timely initiative.
“The banking regulator restricted the imports of luxury and non-essential products amid the volatility in the forex market. This move was necessary. Some banks did not support the initiative’s extension, which will impact the country’s development.”
He added, “If the Bangladesh Bank and the government had not taken those initiatives to curb imports, the forex crisis would have worsened.
“Pressure on the forex market has now eased, and banks are now able to settle around 80 per cent – 90 per cent import payments through their USD income.”
