LC margin doubles for high-end imports

The central bank tightens the letter of credit (LC) rules, doubling the margin for all imports, save some essentials, to ease import-payment pressure on the economy, officials say.
Under the latest move, the Bangladesh Bank imposed a prohibitive 50-percent cash LC margin at the minimum on all non-essential items instead of 25 per cent, according to a notification issued by the BB on Tuesday night.
Besides, such LC margin for high-end motor vehicles like SUV and Sedan cars along with electrical and electronic products which are being used as home appliances has been fixed at minimum 75 per cent, up from 25 per cent.
The products exempted from the LC-margin-restriction inventory are baby foods, essential food and energy products, lifesaving drugs, local and export-oriented industries, government imports for priority projects and agriculture-related imports, according the notification.
"We've imposed higher LC margin to discourage the import of unnecessary items as well as luxury goods," Abu Farah Md. Nasser, deputy governor of the BB, told the FE while explaining the main objective of the monetary measure.
The deputy governor termed it a temporary measure that will also help improve the country's current-account situation.
Talking to the FE, another BB official said importers will have to pay higher LC margin for luxury motor vehicles and electrical and electronic products under the revised rules.
Earlier on April 11 last, the central bank imposed minimum 25-percent cash LC margin on all imports excepting some essential items on the same grounds, as reports say the country's foreign-exchange reserves could get under stress.
The fresh regulatory move comes against the backdrop of rising trend in the current-account deficit alongside depreciating mode of the local currency against the US dollar recently mainly due to higher import-payment pressure on the economy.
The exchange rate of Bangladesh Taka (BDT) has so far depreciated by 1.05 per cent or Tk 0.90 against the US dollar since January 2022 following higher demand for the greenback for settling import-payment obligations, according to market operators.
The dollar was quoted at Tk 86.70 each on the inter-bank market on Tuesday, unchanged from the previous level. It was Tk 85.80 each on January 09 this calendar year.
Some banks, however, traded the US currency at more than Tk 93 in the name of 'corporate deal' to settle import-payment obligations of their customers, they add.
The BDT's latest depreciation came against the backdrop of higher outflow of foreign exchange following higher import payments that far outstrips the inflow in the last few months, according to market operators.
Meanwhile, the settlement of letters of credit (LC), generally known as actual import, in terms of value, rose by nearly 50 per cent to $60.57 billion during the July-March period of the current fiscal year (FY) 2021-22 from $40.48 billion in the same period of the previous fiscal, the BB data showed.
On the other hand, the opening of LCs, generally known as import orders, grew over 46 per cent to $68.36 billion during the period from $46.81 billion in the same period of FY '21.
However, Bangladesh's current-account deficit deteriorated further, hitting an 'all-time high' at $14.07 billion, following higher import payments alongside lower flow of inward remittances during the period under review.
The current-account deficit rose to $14.07 billion during the July-March period of FY'22 from $12.81billion a month ago. It was $555 million deficit in the same period of FY'21.
The remittance inflow dropped by 17.74 per cent to $15.30 billion in the first nine months of FY'22 from $18.60 billion in the same period of FY'21, BB data show.
Experts predict that the ongoing upturn in the current-account deficit may continue in the months to come if the lower inflow of remittances and higher import expenses persist.
They also say pressure on foreign-exchange market may mount in the coming months if the upward trend in current-account deficit continues.
Echoing the BB deputy governor's views, Syed Mahbubur Rahman, managing director and chief executive officer of Mutual Trust Bank Limited, said it would help discourage the import of non-essential and luxury items in the near future.
"We expect that it will also help improve the current-account-balance situation," the senior banker notes.

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