Bangladesh's machinery import plans weighed down by economic jitters

In the face of a volatile foreign exchange market, the tightening of import controls has put the brakes on the opening of letters of credit to ship in goods from abroad at the start of the fiscal year 2022–23, bdnews24.com reports.

The data for the July-August period points to a marked drop-off in capital machinery and raw materials imports, prompting economists to flag concerns about the country's investment prospects.

The value of new LCs opened for capital machinery imports fell 65 per cent to $399.7 million year-on-year in the first two months of FY23, according to data released by Bangladesh Bank.

The downturn in LC-opening in this context is also indicative of the caution with which entrepreneurs and businessmen are treading in new investments and trade expansion in the current economic climate.

Imports of capital machinery are considered new or direct investments into the country. From that viewpoint, Ahsan H Mansur, executive director of the Policy Research Institute, believes new investments will be at a premium in the wake of the economic instability stemming from rising inflation and a surging dollar.

As a result of business people’s reticence, the opening of LCs for the major commodity imports has seen a stark decline.

The upward trend in overall import financing has also slowed, with the new LCs increasing fractionally by 0.41 per cent. The total value of new LCs opened between July and August was $12.40 billion, compared to $12.36 billion a year earlier.

Rizwan Rahman, president of the Dhaka Chamber of Commerce and Industry, expressed concerns while stressing the need to further monitor the situation.

During that period, LCs for the import of intermediate goods also decreased by 3.17 per cent to $964 million.

Similarly, LCs for raw material imports dropped to $4.41 billion, a 6.78 percent decline from the year before. 

SURGING DOLLAR STRAINS NEW INVESTMENTS

Economists as well as businessmen and bankers say that the data is a cause for alarm when it comes to investment. They say that no one wants to buy dollars at a price of Tk 105 to purchase equipment for future investment amid fears of another global recession. Instead, they are willing to bide their time for now.

The focus of policymakers should be on reducing inflation and safeguarding the country's foreign exchange reserves in order to keep the economy chugging along under the present circumstances, according to economist Ahsan Mansur.

In the wake of monetary tightening and curbs on the money supply in the market to rein in inflation, the soaring value of the dollar against the taka has put a strain on new investments.

Imports of all types of goods have picked up as the economy continues to shake off the effects of the coronavirus pandemic.

But the outbreak of the war in Ukraine threw a wrench into the works, just as the green shoots of economic recovery began to pop up. The war's impact on global oil production and supply was particularly profound, triggering a surge in fuel prices. In turn, the demand and value of the dollar skyrocketed. The global economic headwinds soon began to blow in the direction of Bangladesh as inflationary pressures grew.

Against this backdrop, the continued increase in imports weighed heavily on the country's forex reserves as exports and remittances gradually tapered off. Record trade deficits were accompanied by a widening current account deficit.

The price of the dollar began rising in mid-2021 due to a supply crunch in the currency. The crisis deepened towards March this year, prompting the central bank to come up with several measures to curb the spiking rates.

To meet the growing demand for dollars, the central bank began selling the currency from its reserves. In the space of one year, the value of the dollar increased from around Tk 84 to Tk 111 at banks. In the open market, the dollar rate peaked at Tk 121 in August. The central bank reacted by introducing and enforcing curbs on imports in April, and a raft of new directives and policy decisions followed.

Eventually, banks were allowed to set the interbank dollar rate, which has been fluctuating between Tk 104 and Tk 107.

In these circumstances, traders are wary of opening LCs to import any type of new product, according to analysts.

"Imports have stalled due to inflation. Entrepreneurs are reducing imports due to high prices, and the government has also moved to curb unnecessary imports," said Rizwan.

"Imports may pick up again next year if inflation stabilises. New LCs are down, but settlements are up. The effect of the central bank's caution and increased vigilance to save the reserves can be seen in the opening of new LCs."