Central Bank tightens LC regulations as import prices soar

New letter of credit (LC) criteria for local banks have been announced by Bangladesh's central bank amid growing worries about the impact of soaring import costs on the Asian country's foreign exchange reserves. Building on a prior regulation established in mid-July, Bangladesh Bank directed financial institutions to give at least 24 hours' notice before opening LCs for import transactions worth US$3mn or more in a circular released on July 28. The earlier letter set the transaction threshold at US$5 million or higher, excluding transactions involving government acquisitions. Lenders were instructed to disseminate the information to all of their domestic branches "effective immediately" in both letters.

According to Zaidi Sattar, chairman of the Policy Research Institute (PRI), a think tank based in Dhaka, the recent increase in imports has resulted in an excess demand for dollars and "uncertainty" in the local FX market. Prices for energy products and food commodities like wheat and rice shot up to heights not seen in decades after the Russia-Ukraine crisis broke out. Despite a minor decline since March, commodity prices are still high. According to figures from the Bangladeshi government, the country's foreign exchange reserves decreased from around US$45.7 billion to US$39.5 billion as of July 27 while the trade deficit increased to a record US$33.3 billion in the fiscal year that ended in June 2022.

According to Sattar, the central bank no longer uses its own US dollars to control the floating rate in an effort to conserve hard currency. The value of the taka has decreased recently, increasing from about 85 to 95 versus the dollar as of publication time. The Bangladesh Bank has also taken administrative action to reduce the demand for hard cash. It has discouraged importers from utilising LCs for non-essential items in addition to the new LC regulations. The bank increased its minimum cash margin requirement for LCs for non-essential imports from 25% to 50% in May. The LC margin for high-end cars, luxury sedans, and electrical and electronic home equipment has been raised from 25% to 75%, making it even greater.

Source: Global Trade Review 2022