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Banks’ refusal to opening LCs bodes ill for economy

25 Nov 2022 00:00:00 | Update: 25 Nov 2022 01:23:53
Banks’ refusal to opening LCs bodes ill for economy

A few days back media reported on LC settlement spree that jumped by $7.74 billion or 38.6 per cent in the first four months of the current fiscal year. But a TBP report in sharp contrast to the earlier one portrayed a completely opposite picture.

The report said that banks were reluctant to open Letter of Credits (LC) due to shortage of foreign currency. It is really difficult to obtain a real picture. People don’t know what is really going on. Sometimes, from some quarters, misleading information is disseminated creating ambiguity in the minds of people.

The country is in the horns of a dilemma. If LCs are opened in large number it is going to put a strain on the forex reserve and if LCs cannot be opened it is going to disrupt the supply chain in every sector as 90 per cent of raw materials used in producing goods are imported.

The Business Post in a report published on November 24, said the drop in LCs opening had already begun to cause havoc on the manufacturing industry as raw material imports continued to fall. As a result of dollar shortages caused by slow remittance inflow and export earnings banks are now refusing to open any LCs. Again a large number of LCs is going to mature in the current month and December making the banks cautious about allowing LCs openings.

If LCs cannot be opened on time suppliers might take the advantage to set prices of goods at their will in absence of imports leading to rise in prices of various products. A 40 per cent drop in LCs compared to the last fiscal year is big blow to the economy.

Mahbubul Alam, President of Chittagong Chamber of Industry (CCCI) on Thursday told this newspaper: “The banks are discouraging businesses from opening LCs. Raw materials and food item importers cannot open LCs. Small and medium importers are in more trouble. If this situation cannot be resolved, the entire supply chain is likely to collapse.”

In the current fiscal year the government has so far injected $6 billion into the market. In the last fiscal year it injected a record $7.62 billion to keep the money exchange rate stable. But efforts put by the government by injecting dollars into the market have seemed to be futile. Hopes are fading fast with the forex reserve bleeding to death. Every month the central dollar reserve is losing $1.2 billion to $1.3 billion.

The forex reserve now stands at $34.10 billion which was $45 billion in November last year. But according to IMF it now stands at around $27.5 billion given the investment in export development funds and so on. But to a section of economists of the country the figure is less than even what IMF said.

There is no way the government can stop injecting dollars into the market as without dollars imports of essential commodities will come to a halt precipitating other crises in the economy and the life and livelihood of people.

Bangladesh Bank, the central bank, bearing it in mind that with the Russia-Ukraine war and global crisis getting over soon it can overcome the dollar crisis in a few months. But such possibility is only hypothetical. Nobody knows exactly when the crisis will be over.

We may presume many things and think positive but economy has its own law and it acts accordingly and follows its own trajectory. We are hoping against hope that the government will finally can overcome the crisis. The government and central banks together should draw a plan taking into account the root cause of the problem within our economy rather than depending on the global economic volatility to calm down. The sooner the better.