LC margin reset at 25%

The Bangladesh Bank (BB) has reset the letter of credit (LC) margin at 25 per cent for importing non-essential products in order to offset the rising import costs and stave off pressure on forex reserve.

It hopes the measure will reduce the imports of luxury goods and save foreign exchange.

The central bank’s Banking Regulation and Policy Department issued a circular in this regard on Monday. This LC margin would be effective until further notice, said the circular.

The LC margin will be applicable to the imports of all commodities, except for emergency food, medicines, and stuff belonging to export-oriented industries, and agriculture sector, in order to manage foreign currency and debt management activities smoothly, the circular added.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, described the central bank’s decision as timely and right.

“It is not possible to stop the imports of non-essential items totally. But because of this LC margin, importers will now be discouraged to import such items,” he added.

At present, the LC margin is determined based on the bank-customer relationship. The central bank on March 10 this year allowed the facility to open LCs with zero margins for importing daily commodities during Ramadan. This facility will remain effective till May 10.

The minimum LC margin is generally fixed by banks at 2 to 5 per cent. This means importers can open LCs by paying banks Tk 2-5 against an import payment of Tk 100 and then pay the remaining amount in phases after importation.

A central bank official told The Business Post the Bangladesh Bank’s main objective to reset the LC margin was to rein in trade deficit as import costs were rising rapidly.

He thinks this move will discourage the imports of luxury goods. According to him, luxury goods worth $5-7 billion are imported every year.

In the July-February period of the current financial year, import payments increased by 46.7 per cent to $54.37 billion, which was an all-time high in the country’s history.

The ongoing Ukraine-Russia war has led to an increase in commodity prices. Also, as the Covid-19 pandemic is subsiding, it is helping the Bangladesh economy rebound, causing import payments to rise.

Executive Director of Policy Research Institute Ahsan H Mansur told The Business Post recently, “We are heading towards an uncomfortable situation. This should not be allowed to continue. Imports have to be reined in right now.”

During July-February of FY22, export earnings increased by 29.8 per cent to $32.07 billion as trade deficit jumped to $22.31 billion, which was a record in Bangladesh’s history.

Also, in the same period, remittance inflows declined by 19.46 per cent to $13.44 billion while the current account balance deficit rose to $12.83 billion.

Moreover, in this period, the overall balance of payment (BOP) stood at negative $2.22 billion, which had a surplus of $6.88 billion in the same period last year.

The widening deficit keeps exerting pressure on foreign exchange reserves. The central bank’s BOP statement showed the July-February period’s reserve was $45.95 billion, which could settle import payments for 5.1 months.

The foreign exchange reserve, which surpassed an all-time high of $48 billion in August last year, declined to $44.24 billion on April 6. Rising import costs have created a dollar crisis in the country’s money market due to increased demand for the foreign currency.

The central bank recently increased the dollar exchange rate to Tk 86.2. Meanwhile, the unofficial rate reached around Tk 90. A central bank official said taka needed to be depreciated to reduce import costs. “But it will not be a wise decision in the current situation.”

Asked whether the central bank made such a cautious decision after reviewing the current economic crisis in Sri Lanka, he said it had nothing to do with that. He further said Monday’s move would also reduce trade loan defaults as an importer would have to keep Tk 25 in his account against an import payment of Tk 100.

“As an importer will have to deposit more money when opening an LC to import non-essential products, he will certainly be discouraged.”