Importers are not being able to open letters of credit (LCs) in Bangladesh due to dollar crisis. As a result businessmen are not being able to import necessary commodities from abroad. Under these circumstances goods of 2 trillion taka have been imported from overseas on credit. "Please give us dollars. We cannot open Letters of Credit to import raw materials." The statement was made by a top businessman who is involved in diversified sectors - from steel to cement, textile, financial institution and others.
The situation looks bleak when we see drug makers facing the same crisis and saying they won't be able to produce drugs if the situation doesn't improve soon. Consumer products giants, who are the most sought-after clients by banks in normal times, are struggling to import essential commodities.
Even importers of some crucial medical products such as blood bags are not getting dollars to open LCs. Why? It doesn't require tens of millions of dollars to import those. Bangladesh needs only nine lakh bags per year, with each bag costing less than TK100, for a total of less than TK10 crore, or approximately $1 million. But banks are unable to provide this paltry sum.
Hundred percent import-oriented businesses are in desperation as they are not receiving any dollars, making it difficult for them to survive. Apart from a few exporters who have enough dollars to meet their own needs, businesses have been suffering from the lack of greenbacks for the last six months. Businesses fear that the situation may not improve even in the next few months, as the International Monetary Fund has asked the Bangladesh Bank to increase its foreign exchange reserves. This means that the BB may not be able to supply enough dollars to meet the demand. In comparison to Bangladesh, India is managing its financial situation better even though they have similar economic indicators such as per capita income, proportionate GDP, and comparable exports and imports. Why is Bangladesh facing these challenges, even though the situation is far better than that of Pakistan and Sri Lanka?
The ongoing crisis has exposed several weaknesses in Bangladesh's financial management. The country has seen a decrease in its foreign exchange reserves and the local currency, the taka, has depreciated against the dollar by over 20% in six months, causing difficulties for businesses and importers who are struggling to acquire the greenback.
One major factor contributing to Bangladesh's financial crisis is the country's overreliance on imports and the lack of local production of raw materials and goods, putting a strain on the country's foreign exchange reserves. Bangladesh has to import almost everything - from food grains to sugar, edible oil, spices, petroleum products, fertilizer, cotton, yarn, chemicals, machines, raw materials for all kinds of manufacturing units, spices and more. When the Russia-Ukraine war began in February last year, prices of commodities skyrocketed along with a disruption of the supply chain.
Consequently, Bangladesh's import bills for FY22 surged to $82.49 billion, a 36% growth from a year ago. In comparison, import has gone down significantly this year - less than $6 billion per month from an average of over $7 billion last year - and the prices of some commodities are on a decline. According to bankers, the pressure on foreign exchange is still there because of the payment obligations against the LCs they had opened several months ago.
Naser Ezaz Bijoy, CEO of Standard Chartered Bangladesh (SCB) and president of the Foreign Investors Chamber of Commerce and Industry (FICCI), said the good news is that new LC issuance has come down in recent months. But it may take a few more months to clear the payments against LCs issued before September 2022.
According to him, the next few months are crucial to ensure the stability in the foreign exchange market which will require maintaining the momentum of export growth in the face of the looming risk of recession in Europe and America.
UNDP Country Economist Dr. Nazneen Ahmed said, "Economic diplomacy should be efficiently carried out to boost remittances from expatriate Bangladeshis and thus to procure more dollars. At the same time Export Promotion Bureau should take up required measures to enhance export earnings."
Former adviser to caretaker government Dr. Hossain Zillur Rahman said, "A sound amount of foreign currencies reserves should be available in the hands of the government to ensure the payment of import bills for several months. Simultaneously, effective steps need to be taken to keep soaring dollar price under control."