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USD shortage hits consumer goods imports

Arifur Rahaman Tuhin and ASM Saad
02 Dec 2023 21:50:07 | Update: 02 Dec 2023 21:53:16
USD shortage hits consumer goods imports

Last week, one of the largest commodity supplier companies in Bangladesh opened a letter of credit (LC) to bring in essential items, their commercial bank charged Tk 125.5 for per USD for the facility.

Around the same period, another bank charged an edible oil supplier Tk 127.95 per USD for opening a LC. Countless importers, just like these two, have been struggling to import different goods, as getting USD for opening of LCs has become significantly difficult now-a-days.

Speaking to The Business Post, a director of the above-mentioned commodity supplier company said, “We knocked at the doors of at least 20 banks to get enough foreign currency, and we succeeded in the end. But many, who do not have a network, are in trouble.

“Our opening of LCs dropped at least 40 per cent compared to before, due to the foreign currency shortage. This crisis lingers day after day. Sales have already dropped by 20 per cent due to the hike in USD rate. Survival is getting tougher, and we do not know what is ahead.”

Insiders say the banks are failing to open LCs for importers due to the dwindling forex reserves, which in turn has created a domino effect in the consumer market, as well as on employment opportunities across the country.

Data from the central bank shows that the opening of LCs for consumer goods dropped by 39.06 per cent to $1.96 billion year-on-year in the July-October period of FY24. At the same time, the settlement of LCs also dropped by 24.26 per cent to $2.17 billion.

Industry insiders say the USD rate rose year-on-year by at least Tk 15 – Tk 20 during the period, and goods prices also increased in the global market. Under the circumstances, commodities import dropped at least 30 per cent in the first four months of FY24.

Although the central bank is selling USD regularly to meet banks’ demands, the amount is not sufficient. That is why instability has gripped the foreign currency market, and banks are charging USD prices as they see fit.

As a result, Bangladesh is facing skyrocketing inflation. The country witnessed 9.93 per cent general inflation in October, while food inflation was at 12.56 per cent.

Commenting on this issue, former lead economist of World Bank Dhaka Office Zahid Hussain told The Business Post “The regulator has tightened the opening of LCs in banks, and as a result, the process has decreased significantly.

“That does not mean a decrease in demand, and the central bank has failed to boost the amount of greenbacks in the banking channel. The demand for some consumer products rises during Ramadan. If the importers are unable to open LCs, the inflation will soar higher.”

The regulator should clarify what they have planned for the upcoming month of Ramadan, he added.

Meanwhile, Bangladesh Bank Executive Director Mezbaul Haque said, “The importers are negotiating with the commerce ministry.

“The commerce ministry has proper plans to import goods that are essential during Ramadan. I am optimistic that in such cases, the importers will not be facing difficulties while importing goods ahead of Ramadan.”

Dwindling reserves

In August 2021, the country touched a $48 billion forex reserve milestone for the first time ever thanks to the tremendous export and remittance earnings.

But the figure has been declining gradually since mid-2022 as the world fell into an economic crisis due to the Russia-Ukraine war, which started on February 24, 2022. Forex reserves stood at $33.786 billion in November 2022.

Recent central bank data, published on November 30, shows that the country had $19.40 billion foreign currency reserves, calculated as per the International Monetary Fund (IMF) method, and the gross reserves were $25.02 billion.

Economists, however, claimed that the actual amount is less than the central bank’s announcement.

Regulator data shows that the country witnessed a nearly 11 per cent dip in the opening of LCs to $21.82 billion year-on-year during the July-October of FY24. The amount was $24.48 billion in the same period last FY.

On the other hand, LCs settlements of the same period of FY24 dropped by 24.07 per cent to $21.97 billion compared to the July-September of the previous fiscal year.

The Association of Bankers, Bangladesh (ABB), and Bangladesh Foreign Exchange Dealers Association (BAFEDA) fixed the remittance and export rate, but in reality, most of the banks are not complying with this instruction.

On condition of anonymity, several heads of treasury told The Business Post “Several banks are purchasing remittance at the rate of Tk 121 – Tk 123, so these banks are opening LCs at the rate of Tk 124 – Tk 125.

“The central bank is continuously supporting the state-owned banks by selling the USD from forex reserves to facilitate the LC process for the government.”

A number of commodity importers, on condition of anonymity, said their opening of LCs is down by at least 30 per cent in the last four five months due to the USD shortage, though the central bank is giving priority [to the commodity importers].

They, however, said that as the USD rate soared,  impacting the final goods prices, goods demands also declined by at least 20 per cent in recent times.

“Our main challenge is to keep supply uninterrupted in the upcoming month of Ramadan, which will start in March. We are planning for that period,” Biswajit Saha, director for corporate and regulatory affairs at City Group told The Business Post.

He, however, declined to comment about the LC opening issue, saying instead, “Everyone facing trouble in opening LCs as the country is facing a shortage of forex reserves.”

The crisis has also impacted the country’s investment areas, especially the private sector. Due to the issues with opening LCs, capital machinery import drastically slipped in this fiscal year so far.

The central bank data shows that in the July-October of FY23, opening of LCs for capital machinery imports declined by 20.75 per cent to $731 million year-on-year, and settlements are down by 40.99 per cent to $833 million.

Regarding the issue, this correspondent talked to several entrepreneurs, who are investing to open a new venture or expanding business. Most of the entrepreneurs claimed that their commercial banks have been facing trouble in opening LCs.

“The bank failed to open LC on time. On the other hand, the USD rate is increasing day by day, which is increasing our investing cost. The central bank should give priority to investors to open a LC considering the country’s employment,” an entrepreneur said on condition of anonymity.”