Bangladesh Bank (BB) has said it will increase the supply of US dollars in the country's foreign exchange market by freeing up funds currently reserved to settle back-to-back letter of credit (L/C) liabilities.

The move follows the central bank's decision to allow importers to extend corporate, personal or third-party guarantees to foreign lenders making payments to suppliers under buyer's credit against imports on sight L/Cs.

Foreign exchange boost

Pakistan currently faces an acute US dollar shortage. To help alleviate this, BB has asked banks to encash 50 per cent of the balance held in exporters' retention quota (ERQ) accounts.

As there is US$700 million in exporters' ERQ accounts, the move will free up US$350 million to inject into the foreign currency market immediately. Bangladeshi exporters can

keep a portion of their earnings in ERQ accounts to settle back-to-back L/Cs without facing exchange losses.

Access to overseas lenders

The central bank's agreement to allow importers to extend guarantees to certain foreign lenders comes amidst surging L/C demand, up 43 per cent in the three months to May 2022 to US$84,852 million compared with US$59,297 million in the same period in the previous year.

With L/Cs hard to come by in the domestic market (DC World News, 20 May 2022), the BB's agreement to facilitate short-term import finance under buyer's credit should enable importers to access cheaper funds from an overseas lender compared with what may be available locally.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.