Dhaka, Bangladesh (CU)_ The central bank of Bangladesh has imposed new letter of credit (LC) rules for local banks in response to mounting concerns about the impact of soaring import prices on the country’s foreign exchange reserves. According to a recently released circular, Bangladesh Bank directed financial institutions to give at least 24 hours’ notice when opening LCs for import transactions worth more than US$3 million, expanding on a rule imposed in mid-July.
The previous letter established the transaction threshold at over $5 million, excluding government purchases. In both letters, lenders were instructed to quickly disseminate the information to all domestic branches. According to Zaidi Sattar, chairman of the Policy Research Institute (PRI) in Dhaka, the recent increase in imports has caused high demand for dollars and uncertainty in the local foreign exchange market. As a result of the Ukraine conflict, the cost of energy and food products, such as wheat and rice, reached unprecedented levels not seen in decades. Since March, commodity prices have decreased slightly, but remain high.
According to figures from the Bangladeshi government, foreign exchange reserves decreased to US$39.5bn in July from roughly US$45.7bn a year earlier, while the trade deficit soared to a record US$33.3bn in the financial year ending June 2022. According to Sattar, the central bank has ceased using its own US dollars to regulate the floating exchange rate in an effort to save hard currency. In recent months, the taka has depreciated, increasing from around 85 per dollar to 95 at press time.
Bangladesh Bank has also taken administrative initiatives to limit the demand for hard cash. Apart from the new LC regulations, importers have been discouraged from utilizing letters of credit for non-essential imports. In May, the bank increased the required cash margin on letters of credit for non-essential imports from 25% to 50%. The LC margin for sedans, luxury automobiles, and electronic and electrical household equipment has been increased from 25% to 75%.
