The Bangladesh Bank on Tuesday asked all scheduled banks to slap high margins on opening letters of credit for the import of luxurious and non-essential items, setting the minimum margin at 75 per cent for motor cars like sedan or SUV.
The minimum 75 per cent margin would also be applicable to electronic and electric items used as home appliances.
However, high LC margins would not be applicable to import of essential items like baby food, essential food items, fuel, lifesaving medicines and medical equipment endorsed by the health ministry, raw materials and capital machinery for local and export-oriented productive purposes, agricultural products and essential items for the government priority projects.
Other than these items, the banks were asked to fix the minimum import duty at 50 per cent.
Prior to setting the margin rate at 50 per cent, the central bank on April 11 fixed the minimum LC margin for the import of non-essential products at 25 per cent.
The BB made the changes within a month with a view to containing the massive growth of imports amid depletion of the country’s reserve by $6 billion dollar within a span of eight months.
The country’s reserve dropped to $41.9 billion in April from $48.06 billion in August, 2021.
The decline in the country’s reserve also weakened the country’s import payment capacity.
With the August 2021 reserve, Bangladesh was capable of paying import bills for 8.39 months, but the drop in the reserve has lowered the country’s capacity in recent months.
Bangladesh Bank data showed that the country in March 2022 was capable of paying import bills for 6.1 months when its foreign exchange reserve was $45.15 billion.
The payment capacity has deteriorated further if it is calculated based on the latest reserve amount.
A BB circular issued in this regard on the day said that the global trade situation, effect of the coronavirus pandemic and the Russia-Ukraine war prompted the central bank to take the initiative for a more effective money and credit management in the country.
A BB official, however, said that the BB’s instruction would be discouraging for the import of such commodities on credit, adding that the high LC margins would not make any difference in import cost of the BB-specified items.
Even after slapping high LC margins on non-essential items in April, the country’s import cost has not changed much and that is why the central bank hiked margins further, he said.
Besides increasing LC margins, the central bank also allowed devaluation of Taka against dollar to Tk 86.7 from Tk 86.2 per dollar a month ago to tackle trade imbalance.
Bangladesh’s trade deficit hit an all-time high of $24.91 billion in the July-March period of the current fiscal year 2021–22 with imports reaching a record high.
The country’s import payments in the first nine months of the fiscal year also reached an all-time high of $61.52 billion, if the amount is compared with the country’s yearly import payments.
If the current trend of import continues, imports in the current fiscal year may exceed $80 billion.
Though the export earnings also grew significantly in the current fiscal year, the growth was inadequate to offset the trade gap created by the unusual growth in imports, creating an unusual surge in the country’s trade deficit in the current fiscal year.
The Asian Development Bank in its latest Asian Development Outlook 2022 projected that the country’s current account deficit would increase significantly in FY22.
It said that the country’s remittance fall and import growth might increase its current account deficit to 2.7 per cent of the GDP in FY22 from 0.9 per cent of the GDP in FY21.
Apart from the trade deficit, the country’s current account deficit also reached a record high — $14.07 billion — in the first nine months of FY22.
The deficit in the first nine months of FY22 was the highest after the deficit of $9.57 billion in FY18.
Prior to the imposition of the minimum margin at 25 per cent, the BB regulations permitted banks to opening LCs even at zero margin.