Imports Against Sales Contracts: An Ease for Supply Chain

 

Coal imports through sales contracts are reported to be allowed up to 5 million US dollar from 0.50 million US dollar. Coal-based power plants would be benefitted, the report noted.

Import transactions of the country are executed in accordance with Import Policy Order (IPO) in force. The prevailing IPO allows imports without letters of credit (LCs). Earlier such imports were executed by a system known as imports by LCAF (letter of credit authorization form). This is a document which needs to be registered with banks for imports without LCs. The document was phased out, leading to facilitate import trade. With the phase-out of LCAF, central bank vide a notification instructed banks what to in case of imports without LCs.

In accordance with IPO in force, imports can be executed through sales contracts without LCs. The transactions are allowed by industrial importers for imports of industrial raw materials, capital machinery, and fire doors regardless of value. But commercial imports are allowed up to 0.50 million US dollar in a year.

International trade constitutes exports and imports. There are different methods used to execute international trade. Advance payments are one of the methods favorable to exporters. In this method, importers need to make payments to exporters before movement of shipments. With regards to import transactions, foreign exchange regulations of the country allow advance payments against repayment guarantees from reputed banks abroad. Except guarantees, a small value can be remitted as advance payment for relative imports.

LC method is widely acceptable method. This is known as documentary credit for which LC issuing banks give payments commitments to exporters subject to compliance of the terms and conditions contained in the LCs. In our case, most of import transactions of the country are reported to be executed through LC method. As banks extend payments commitments, exporters abroad are in comfortable position. Due to liquidity crunch in the foreign exchange market, banks are said to be unable to make payments commitments by opening LCs. 

On the other hand, insider information indicates that export trade of the country is executed mostly on sales contracts. This is a bilateral agreement between exporters and importers. Exporters ship goods to importers and send export documents through their banks to importers’ banks abroad. Banks abroad release documents on receipts of payments in case of sight bills. But the documents are released against acceptance by importers with payments date in case of credit bills. In such cases, importers’ banks remit payments if they receive the same from importers. For delay or no payments, banks abroad do not take responsibility as they do in case of LC method. This is known as documentary collection method.

There is another method known as open account. This is basically a bilateral trade arrangement between exporters and importers on credit terms. This is a risky game for exporters. To encounter payment risk, exporters buy payments guarantees and early payments services from financial entities. Exporters in Bangladesh can execute exports under open account method in accordance with the regulatory framework available in this regard. But import under open account is not permitted.

International trade is a bilateral arrangement under which Bangladesh exports goods against sales contracts since long. Other than commercial imports with limited scope, major imports like industrial inputs and capital goods are permissible under sales contracts. But insider information indicates that our importers are not at such position of credibility to import on sales contracts.

As noted earlier, most of the export trade are executed under sales contracts. Export is dependent on input contents. Our exporters import input contents from suppliers nominated by importers. But nominated suppliers do not ship goods under sales contracts, rather they require LCs.

LC method is a method used since long. It is reported that LC method is costly and beset with huge documentation. As such, LCs are being phased out globally. But different view is found in case of imports by Bangladesh. Study shows that South and South East Asia depend on LCs. Bangladesh is one of them. Bangladesh is on the path of trade transactions by sales contracts, but it is one sided: only on export for which exporters are taking risk on importers abroad.

As said earlier that import trade is guided by IPO in force, which does not fully allow imports under sales contracts. Does it indicate that regulations discourage imports under sales contracts? Maybe or maybe not. But import under sales contracts is an indication that importers are in trustworthy position.  Exporters do not need payments commitments from importers’ banks. Major imports of the country are not executed on sales contracts; it shows that we are yet to reach the level of confidence to the suppliers abroad.

The recent news indicates that ministry concerned is going to allow coal imports on sales contracts beyond the prescribed limit of 0.50 million US dollar. The decision is the result of crunch in foreign exchange market. Under LC method, there are some formalities at home and abroad. Banks open LCs on behalf of their importer-customers favoring foreign suppliers. In most of the cases, LCs need to be confirmed by banks abroad. Confirmation means that foreign banks take exposure on LC issuing banks and give payments commitments to suppliers abroad in case of failure of payments by importers’ banks. LC opening banks impose commission to importers and confirmation charges need to be paid abroad. LCs are either sight term or credit term. In case of credit term, LC charges at both ends continue till its tenure. As such, trade under LC is costly for importers. Such charges are not required for imports under sales contracts. Banks in this regard work as facilitators without taking exposures on respective parties.

As noted earlier, trade is executed on sight term or credit term. Import under credit term is permitted as per foreign exchange regulations issued by central bank. Such facilities are mainly available to industrial importers against imports of industrial raw materials and capital machinery for a maximum period of one year. It is reported that coal import is going to be allowed without LCs. It indicates that import will be executed on commercial basis meaning importers to import for onward sales to power plants. Coal is treated as industrial raw material provided that it is imported by power plants. But commercial import is not permissible on credit term. As such, commercial import needs immediate payments within 5 business days from the receipt of import documents. Otherwise, banks will not release documents to importers for release of goods.

It is not easy to make payments on sight term against commercial imports under sales contracts. On the other hand, foreign exchange market is not in such a position to support the payments. Hence, commercial imports need additional permission with regards to settlement of payments at later date which can bring ease in foreign exchange market. The respective ministry is going to decide commercial imports of coal on sales contracts. Along with the decision, extending credit facilities for the imports are also an inevitable need.

Trade under sales contracts is an indication of creditworthiness. In this perspective, there comes a question why IPO does not allow imports under sales contracts at full-fledge. It seems carrying no answer, rather it is continuing since the period in which licenses were required for imports. The licensing period is over. It is high time to allow permissible imports against sales contracts regardless of value which can save costs in foreign currency. In addition, credit facilities need to be extended to imports executed commercially provided that the items of which will ultimately be used for industrial purposes.

External sector of the country is in trouble to manage foreign exchange.  This leads importers to face problems to open LCs. If importers are in good position with suppliers abroad, they can import on credit term without LCs. Trade should not be allowed to miss the journey, sales contracts need to be allowed for commercial imports irrespective of value. In addition, imports useable for industries should also be accorded with general permission to avail credit facilities up to a certain time.
 

Mehdi Rahman works in the development sector.