Reserve pressure mounts as LC settlements jump by $7.7b

The letter of credit (LC) settlements jumped by $7.74 billion or 38.3 per cent year-on-year in the first four months of FY23, leaving no respite for Bangladesh’s foreign exchange reserves.

Latest data from the Bangladesh Bank show that during July to October this FY, LC settlements stood at $27.94 billion, up from $20.20 billion in the same period last FY. LC settlements grew by 65.96 per cent year-on-year in October.

This growth was 10.19 per cent during this September, 29.30 per cent in August and 64 per cent in July.

Despite a series of measures by the central bank to reduce imports, LC settlements jumped sharply because Bangladesh is now paying the import bills that were deferred in the previous months, industry insiders say.

They added that the price rise of essential commodities in the global market was another reason behind the growing trend of LC settlements in recent months.

Zahid Hussain, former lead economist of World Bank Dhaka office, said, “Both the deferred payments and price rise of commodities in the global market were the key reasons behind the growing trend of LC settlements.

“The issue will create further pressure on our foreign exchange reserves.”

The country’s gross forex reserves stood at $34.24 billion on November 16, but the usable reserves were $26.24 billion, as per the central bank data. The gross forex reserves reached the record highest at $48 billion in August last year.

Bangladesh’s reserves continue to fall due to the USD selling spree of the central bank. During July to November 16, the banking regulator sold $5.87 billion to banks to settle import payments of essential raw materials and commodities.

On the other hand, the opening of LCs did not come down as expected despite austerity measures taken by the government and the central bank.

During the July-October period of FY23, openings of LC stood at $24.26 billion, down from $26.04 billion in the same period last FY, show the central bank data.

Following a number of measures for curbing imports amid the ongoing pressure on forex reserves, Bangladesh registered 10.81 per cent negative LC opening growth in August, 21.40 percent negative growth in September.

But the negative growth in this segment was only 7.24 per cent in October.

In July this year, the central bank imposed a 100 per cent LC margin against the import of luxury and nonessential items. The same month, the regulator asked banks to inform it 24 hours before opening an LC worth $3 million or above as part of its austerity measures.

Economist Zahid Hussain said, “It is very concerning that the LC opening did not come down to the expected level despite multiple initiatives. If this happened while importing essential commodities and oil, then it is alright.

“But if this happened because of the imports of luxury or non-productive goods, then it is bad news.” 

Policy Research Institute (PRI) of Bangladesh Executive Director Ahsan HMansur said, “There were three reasons behind the rising trend of LC settlements. The first reason is that the banks are now settling LCs opened during the March-June period this year.

“The second reason was the price rise of essential commodities in the global market.

The third reason was that the number of LC openings was significantly big after the pandemic.”

Mansur further said, “The LC openings did not come down by much in October because it was high as the government may have been stockpiling fuel and fertilisers to tackle the economic headwinds.

“I hope that the pressure on forex reserves will come down in the coming days if the remittance and export earnings go up.”

Expressing his concerns about the short term external debt, Zahid Hussain said, “Such loans may negatively impact our forex reserves.”

At the end of June of this year, Bangladesh’s short term external debt stood at $20.64 billion.

Of the figure, $17.75 billion was in the private sector and 2.89 billion in the government sector, show central bank data.