Bangladesh Bank has halved import letter of credit (L/C) margins on 56 categories of items that it considers to be essential and consumer items.

The central bank announced the reductions on earlier this month in what appears to be a response to conditions imposed by the International Monetary Fund (IMF) on loan disbursements under Bangladesh's Poverty Reduction Growth Facility (PRGF).

Reverse move

Margins are reduced from 100 per cent to 50 per cent on L/Cs for goods as diverse as biscuits, imitation jewellery, plastic goods, cement, footwear, newspapers, magazines, cosmetics, televisions and some refrigerators and vehicles.

The latest move reverses the central bank's decision in November 2001 to impose 100 per cent L/C margins on all consumer and essential items, a move aimed at the time to ease pressure on foreign exchange reserves amidst a surge of imports of non-essential items.

Improved forex

The reduction of L/C margins now is made in the context of Bangladesh's much improved foreign exchange situation. At the time the 100 per cent margin was imposed, forex reserves had fallen to around US$1 billion but by October 2003, they had more than doubled to over US$2.5 billion.

The other prompt for the bank to reduce margins is the PRGF suggestion for the authorities to abolish all L/C margins by November this year. The government seems to be cutting margins incrementally. Over the past few months the central bank has reduced margins on rice and wheat imports.

More L/C business?

Recently there have been significant increases in the value of import L/Cs in Bangladesh according to central bank figures. Authorised banks opened aboutUS$1761.32 million of import L/Cs during July and August this year, an increase of 31.43 per cent in US dollar terms over the same period last year.

These increases have been achieved because of some very sharp rises in July and August 2003 of 68.23 per cent in capital machinery, 34.52 per cent in industrial raw materials and 28.97 per cent in machinery for miscellaneous industries in US dollar terms over the same period last year.

Bangladesh Bank points out however that the increases should be seen in the context of the country's parlous economic condition a year ago when the Bangladesh was experiencing negative growth and that the value of L/Cs opened in July-August 2003 is down on the previous two months.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.