Home ›› 24 Nov 2022 ›› Front
The country is on path to face a catastrophic supply chain crunch, businesses fear, as most scheduled banks are refusing to open letter of credits (LCs) due to a shortage of foreign currencies.
The fall in LC openings has already begun wreaking havoc in the manufacturing industries as raw materials imports continue to fall, business leaders said, warning that if this goes on, the country will witness a complete collapse of the supply chain.
“The banks are discouraging businesses from opening LCs. Raw materials and food item importers are failing to open LCs. Small and medium importers are in more trouble. If this situation is not resolved, the entire supply chain is likely to collapse,” Mahbubul Alam, president of Chittagong Chamber of Commerce and Industry (CCCI) told The Business Post (TBP).
“I have written to the governor of the Bangladesh Bank last month, requesting him to continue LC-opening,” he said, adding that the government must come forward in resolving the situation.
Strong dollar wreaking havoc
During the July 1 - November 10 period of the ongoing fiscal year 2022-23 (FY23), openings of LC stood at $25.48 billion, down from $28.97 billion in the same period of last fiscal year, according to 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.
Explaining the fall, Dhaka Bank Managing Director Emranul Huq said a large number of LCs are set to mature in November and December.
He said Banks are being cautious to open LCs as they are struggling to settle previous ones due to dollar shortages caused by the slow trend of remittance inflow and export earnings.
The Dhaka Bank MD hopes the ongoing situation will start to improve from January next year.
Apart from the drop in openings, banks are also struggling to open LCs on time.
Pubali Bank Managing Director and CEO (current charge) Mohammad Ali said, “It is true that we reduced opening LCs.”
“Clients who previously had an LC limit of $300 million now have a limit of $120 million,” he said.
Despite the austerity measures taken to reduce imports, he said luxury items are still being imported.
Govt is the only saviour
“It is taking 30-35 days to open an LC these days. Previously, it would take only 5-6 days,” said Zahir Uddin, managing director of Confidence Cement, adding that his company has seen a decrease of 10-15% in LC-opening this year compared to last year.
He called on authorities to launch a quota system to resolve the delay in opening LCs.
“If LCs are not opened on time, then importers will have nothing to do even if suppliers take advantage of the situation and set prices as they see fit. This will result in product price hikes at the consumer level,” he added.
A senior official of a top conglomerate of the country said they suffered a 40% drop in LC openings this year compared to FY22.
“We recently asked a company to make calendars for the coming year. They demanded two and a half times higher price than last year, that too, saying that lower quality paper will be used this time due to paper shortages caused by a lack in imports,” he said explaining the impact of decrease in imports due to disrupted LC openings.
The businessmen, in condition of anonymity, said “Getting out of this crisis will be difficult unless the top-level of the government takes steps. No one will invest in this situation.
“They could try getting foreign loans through the banks. But not all banks have the capacity for that.”
He concluded that it is now on the government’s shoulder to support the banks in tackling the situation.
Looming supply chain crunch
Opening import LCs is of paramount importance to keep the production steady.
Nearly 90% of raw materials used by the big industries, including the ready-made garments, is imported, according to business leaders. The decrease in import will eventually lead to a catastrophic supply chain crunch.
Industry insiders say the Bangladesh Bank has imposed a ban to curb the import of luxury items. There is no restriction for essentials, production and import-oriented industries. But banks are being reluctant to open LCs for these industries as well.
They also alleged that banks are not opening LCs for even big industries with LC limits, citing dollar shortages. This is making it hard to keep production on.
“90 per cent of raw materials we use in producing goods are imported. But now banks are not opening LCs for us,” Tapan Sengupta, deputy managing director of BSRM Group, the country’s largest steel manufacturing company, told TBP.
He said, “Earlier we used to open LCs worth up to $10-15 million on a regular basis. Now we are struggling to open even $2 million worth of LCs.
“Even as the prices of raw materials in the international market have decreased, we are not failing to take advantage of the opportunity without LCs.
“If you fail to open LCs, the raw materials will not come. If the raw materials do not come, the factory will not run. Thousands of workers will become unemployed.”
Meanwhile, according to data from the National Board of Revenue, the country’s top importing private companies currently include large industrial groups that import construction materials and edible oil.
Abul Bashar Chowdhury, chairman of consumer goods importer BSM Group, said, “After overcoming the impacts of the Covid-19 and the Russia-Ukraine war, the prices of consumer goods in the world market are almost on the downward trend.”
However, he said due to not being able to open LCs as per demand because of the crisis created by a strong dollar, the consumer market is experiencing a volatile situation.
“Prices of the daily products in Khatungonj, the country’s largest wholesale market, are fluctuating at the moment. Supply is falling short of demand, destabilising the market,” he added.