Banking sector feels the pinch of paying LC liabilities

Al Amin :
The country’s banking sector is facing an uncomfortable situation with payment of record letter of credit (LC) liabilities as well as payment of public and private foreign loan installments.
Many banks are failing to pay their LC liabilities on time and some are not being able to supply sufficient dollars to repay the foreign loan installments due to the acute dollar crisis.
Under the circumstance, the Bangladesh Bank has to inject dollars in the market constantly. The injection of US dollar into the market accounted $4 billion so far, creating further pressure on the country’s foreign exchange reserves that are now depleting fast.
The central bank injected a record $7.62 billion in the last fiscal year to keep the exchange rate stable.
High import payments are the main reason for the depletion of forex reserves, which stood at $36.3 billion as of October 12 in contrast to $36.5 billion on September 29 earlier this year and $46.2 billion in September last year.
Ahsan H Mansur, Executive Director of the Policy Research Institute (PRI), told The New Nation, “The central bank is injecting dollars. It means the demand for the greenback is still higher than the supply.”
The remittance and export earnings are not giving any positive sign, creating a worry for the county’s macro-economy, he said.
“If remittance and export earnings decrease further, the central bank should give efforts to squeeze imports payments more,” he opined.
According to an observation prepared by foreign exchange policy division of the central bank, the amount of foreign loan will be stood at $115 billion by the end of 2023 and $130 billion by 2024.
The country’s foreign debt repayment amount including interest was $11.7 billion in 2021 and it will be more than twice at the end of 2022 ($23.4 billion).
Of the foreign debt, the private sector will have to pay about $18 billion and remaining $5 billion will be paid by the government.
However, the debt repayment pressure is likely to be reduced slightly in 2023 and 2024 as the country will have to pay around $20 billion during the time, the BB observation said.
The electricity and fuel sector accounts for a significant share of short and long term foreign debt in the private sector as the businesses of the sector took loans worth $ 4.1 billion.
But now the businesses are incurring losses to repay the foreign loans due to dollar crisis and increased price of the greenback, which is forcing businesses to delay the repayment of the foreign loan.
The value of taka already saw a sharp decline after the central bank had allowed banks to set the exchange rate of the local currency against the US dollar.
The exchange rate of the taka stood at Tk 105.66 per dollar on October 12, down 23.43 per cent from a year ago.
Following the situation, the banks, loans supplied through offshore units, are now in danger and the companies that have taken direct foreign loans through the Bangladesh Investment Development Authority (BIDA) are also worried about the repayment of the installments on time.
The depreciation of the local currency has already reduced the opening of letters of credit (LCs), which will have a positive impact in curbing the depletion of foreign exchange reserves.
The number of LCs opened accounted to $12.4 billion in the first two months of the ongoing fiscal year in contrast to $12.3 billion in fiscal 2021-22.
However, the settlement of LCs has increased to $15.3 billion, up 42.3 per cent from a year earlier.
G M Abul Kalam Azad, Spokesperson of the central bank, said that some of the recommendations given by the foreign exchange policy division of the BB have already been implemented.
Besides, we are strictly monitoring the dollar market and are working hard to bring stability in the market, he said.