Letters of credit (L/Cs) are becoming harder to come by in South Asia's smaller economies as they seek to cope with difficult economic conditions.

Most recently, Bangladesh followed Nepal's move to restrict the use of L/Cs for non-essential imports while banks in Sri Lanka have been unable to issue L/Cs since last year.

Bangladesh

The central bank of Bangladesh last week revised its L/C rules by doubling margins for all but imports of essential items in its efforts to maintain its current account.

Importers must now find at least a 50 per cent rather than a 25 per cent margin for all non-essential goods while the margin for luxury items, including high-end vehicles and household appliances, is fixed at a minimum of 75 per cent, up from 25 per cent.

Products exempt from the new L/C margins include essential foodstuffs and medicines as well as imports for priority projects and agricultural use.

Balance of payments

Imports into Bangladesh increased by 44 per cent in the first nine months of the 2021-22 fiscal year compared with the previous year while exports increased at a slower rate of 33 per cent.

Remittances from Bangladeshis working abroad, a key source of foreign exchange, fell by around 20 per cent in the first four months of 2022 compared with the previous year.

Nepal and Sri Lanka

Nepal's central bank has ordered the country's commercial banks not to issue new L/Cs for the importation of vehicles and other non-essential goods as part of its efforts to preserve dwindling foreign exchange reserves (DC World News, 11 April 2022).

Sri Lanka's banks lost the ability to honour L/Cs in mid-2021 while banks in India made L/Cs harder to come by for Indian exporters selling goods to Sri Lanka as the island nation struggles with a severe foreign exchange and debt crisis (DC World News, 12 January 2022).

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