Bangladesh Central Bank's Restrictive Measures Target Import LCs

Domestic Correspondent Report: Bangladesh

Being an import-dependent country, Bangladesh has consistently had a balance of trade (BOT) gap. Despite this gap, the overall forex situation was considered normal in 2021. During the pandemic, the policy measures undertaken by the country’s central bank (Bangladesh Bank) and the government were appropriate for this extraordinary time and had a positive impact on the economy. The economy rebounded and was poised to achieve the normal expected growth trajectory across most of the macroeconomic fundamentals.

During first quarter 2022, there was a sharp increase in the opening of import LCs and this pace continued through June 2022. Over this period of January to June 2022, the country’s monthly import volume was around USD 7.5 billion compared to the regular monthly volume of USD 5.5 to 6 billion which was seen in the same period of the previous year.

Conversely, the monthly average export volume and inward remittance were USD 4.56 billion and USD1.89 billion, respectively. This excessive import disparity has widened the already existing balance of trade gap. As a result, Bangladesh Bank injected US Dollars into the inter-bank market from its foreign currency reserve. Consequently, foreign currency reserves plummeted to USD 39 billion in June 2022 from USD 44 billion in April 2022.

Against this backdrop, Bangladesh Bank has taken certain austerity measures to reduce the import volume. Bangladesh Bank at first aimed to discourage commercial imports by increasing the margin requirement for opening LCs and then placed an additional cap on all types of imports at or above USD3 million. A summary of relevant recent circulars issued by Bangladesh Bank:

Taking all the above restrictive measures into account, Bangladesh’s monthly import settlement volume in August 2022 decreased to USD 5.98 billion compared to USD 7.42 billion in July 2022. It is reasonable to expect that lower import volumes will continue for the remaining months of 2022.

The good news is that the export volume during the months of July and August 2022 stood at USD 8.59 billion (an average of USD 4.24 billion per month) and inward remittance for the same two months was USD 4.12 billion (USD 2 billion per month). With this decreasing import growth and stable export and inward remittance, Bangladesh’s forex position is stabilizing.