March 28, 2023

Dhaka, Bangladesh – Spice dealer Mohammed Enayet Ullah has made at the least 4 makes an attempt since November to open a letter of credit score to pay for imports of cumin, cardamom and cloves, a few of the most important spices utilized in Bangladeshi cooking, solely to be refused by banks because of a To put in scarcity of {dollars}.

Importers in Bangladesh have to open letters of credit score with one of many nation’s 61 scheduled banks to purchase overseas items and providers. It’s primarily a monetary contract issued by an importer’s financial institution that ensures cost to the vendor in {dollars}. In case a purchaser does not pay up, the financial institution has to tackle the liabilities.

However there’s a extreme scarcity of bucks in Bangladesh because of its dwindling overseas reserves and a pointy drop within the worth of its taka foreign money towards the greenback. Previously six months, Bangladesh’s overseas reserves have dropped beneath $32bn from $39bn whereas the worth of the taka has fallen by 27 % from 84 to the greenback to 107.

The South Asian nation has been going through extreme financial hardship since Russia’s invasion of Ukraine a 12 months in the past. In its import-dependent economic system, rising world gasoline oil and different commodity costs have brought on almost double-digit inflation and depleted overseas reserves.

To guard the declining reserves, the federal government had stopped all non-essential imports and decreased the availability of {dollars} to industrial banks. This has not solely pressured banks to refuse new letters of credit score purposes however has additionally made their promised funds to overseas suppliers for earlier imports unsure.

Native media reported that at the least 20 banks with unfavourable balances of their overseas foreign money holdings couldn’t make these funds.

In line with Bangladesh Financial institution, the central financial institution, the variety of new letters of credit score slumped 14 % year-on-year within the July-to-December interval, and funds of these money owed declined by 9 %, indicating defaults.

These numbers, nevertheless, do not absolutely convey the perils of medium-sized importers like Ullah.

Ullah owns the spice buying and selling firm Hedayet & Brothers, which often imports half of its annual $2m of important spices forward of Ramadan, the Muslim holy month, wherein native consumption at the least triples within the South Asian nation. However now, with barely a month left till the beginning of Ramadan, he’s apprehensive {that a} failure to safe new provides would put a giant dent in his stability sheet.

“I’ll lose an enormous enterprise,” Ullah, who additionally acts because the president of the Bangladesh Spices Merchants Affiliation, advised Al Jazeera, “Merchants can be compelled to extend the costs of spices due to the growing hole between demand and provide. Finally shoppers would be the largest losers.

A grocery shop in Dhaka with gunny sacks of rice and lentils
Costs of at the least 56 client merchandise together with imported edible oil, sugar and lentils have elevated from 15 % to as excessive as 60 % prior to now 12 months [Mahmud Hossain Opu/Al Jazeera]

Concern of shedding credit standing

Giant companies additionally haven’t been capable of insulate themselves from the greenback disaster. In January, a number of ships carrying items like sugar and cooking oil for the importer Meghna Group of Industries (MGI), a Bangladeshi conglomerate with $1.2bn in revenues, bought caught in Chattagram port for weeks because the guarantor Agrani Financial institution could not make the cost. to the overseas provider because of a scarcity of {dollars}. MGI, nevertheless, had paid the total quantity to the financial institution for the merchandise in native foreign money.

“We needed to pay a day by day transport demurrage of $78,000 whereas the ships bought caught within the port due to the financial institution’s failure to settle the cost,” Monowar Ali, MGI common supervisor advised Al Jazeera.

Agrani Financial institution declined to touch upon its present US greenback reserves, however considered one of its officers who spoke on the situation of anonymity as a result of he isn’t licensed to talk to the media confirmed that the financial institution remains to be scrambling for {dollars} to settle its earlier letters of credit score. obligations.

On Tuesday, information companies reported that Bangladesh’s non-public energy producers, which give greater than half of the nation’s electrical energy, have been additionally wanting the $1bn in overseas foreign money that they should pay for imports of gasoline oil to keep away from an vitality disaster in the summertime. .

Delays in greenback funds to overseas counterparts, in the meantime, have brought on a picture disaster. Bankers and economists worry that the failure to adjust to cost deadlines, that are often 180 days, will put Bangladesh susceptible to a credit standing downgrade.

Moody’s, one of many huge three world ranking companies, not too long ago lowered Bangladesh’s local-currency and foreign-currency ceilings to Ba1 and Ba3 from Baa3 and Ba2, respectively. It additionally positioned the nation’s long-term issuer and senior unsecured scores of Ba3 on overview for downgrade.

Ba scores point out substantial credit score threat.

“Bangladesh’s weakening exterior place raises exterior vulnerability and authorities liquidity dangers in a method that is probably not according to its present ranking,” Moody’s mentioned.

Syed Mahbubur Rahman, former president of the Affiliation of Bankers, Bangladesh advised Al Jazeera that if the nation’s ranking in the end goes down, import prices for banks will go up considerably as a result of they should pay commissions to 3rd events to get letters of credit score confirmations.

Zahid Hussain, former lead economist on the World Financial institution’s Dhaka workplace, advised Al Jazeera that in direction of the tip of 2020, the three main scores companies – S&P International Rankings, Moody’s and Fitch Rankings – all downgraded Sri Lanka’s credit score scores on expectations of degradation as a result of lack of favorable financial and financial circumstances.

“If the state of affairs doesn’t enhance, it certainly can occur right here,” he warned.

Bangladesh central bank
Bangladesh Financial institution, the nation’s central financial institution, says rising import funds have depleted the nation’s overseas trade reserves [File: Mohammad Ponir Hossain/Reuters]

Will IMF loans make an impression?

Officers from the Bangladesh Financial institution mentioned excessive import funds, particularly for the reason that Ukraine struggle has stoked commodity costs, was the principle purpose for the depletion of overseas reserves. Nonetheless, Mezbaul Haque, the central financial institution’s spokesperson, predicted the disaster created by the scarcity of greenback can be resolved throughout the subsequent few months.

“Since we’ve curbed our spending on imports, our import payments can be decrease within the coming months,” Haque advised Al Jazeera. “This may ease the stress on our greenback reserves.”

He mentioned the online greenback stability of the nation’s industrial banks has already elevated as much as $3.17bn from $2.2bn at the start of this 12 months.

That quantity, nevertheless, remains to be half of the $5bn to $6bn that these banks usually had of their coffers earlier than the nation plunged into the continuing financial turmoil, Rahman mentioned.

The flip aspect of that, nevertheless, is that curbing imports is pushing up costs when inflation is already excessive. Information from the Client Affiliation of Bangladesh, an advocacy and analysis group, confirmed costs of at the least 56 client merchandise that included import-oriented edible oil, sugar and lentils have elevated from 15 % to as excessive as 60 % prior to now 12 months.

However there’s a glimmer of hope for the nation’s beleaguered funds. Initially of February, Bangladesh obtained a dose of economic reduction within the type of the Worldwide Financial Fund. authorised a $4.7bn mortgage program. Bangladesh has turn out to be the third South Asian nation after Sri Lanka and Pakistan to hunt IMF loans, however in contrast to its crisis-hit neighbors, Bangladesh has not requested for a bailout package deal, relatively a stabilization package deal.

Australia-based Bangladeshi economist Jyoti Rahman advised Al Jazeera that the IMF mortgage ought to assist bolster the overseas foreign money reserves and keep away from a credit score downgrade.

“Along with direct IMF financing, such packages have a ‘crowding in’ impact as different worldwide lenders will turn out to be extra amenable to finance the present account deficit of Bangladesh,” mentioned Rahman, who’s hopeful that may occur quickly.

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