Bangladesh is struggling to keep the lid on inflation substantially caused by a shortage of imported essential items. One of the measures taken by the Bangladeshi central bank to combat this has been to encourage commercial banks to offer letters of credit (L/Cs) to smaller importers to buy goods that are in short supply.

The central bank has said that the number of L/Cs opened for imports has increased, but local media reports suggest that despite this increase, essential goods remain in short supply, which exerts pressure on inflation.

Ineffective

Quoting "informed sources", local media reports suggest that while banks have succeeded in attracting smaller businesses and entrepreneurs to open a large number of L/Cs they have not resulted in imports of essential items sufficient to alleviate shortages and curb inflation.

More experienced importers are saying that some of the people and businesses that have opened L/Cs simply do not have the contacts or capabilities to import goods.

Currency scams

Compounding this apparent problem, larger and more experienced importers are reluctant to open L/Cs because of tighter disclosure requirements issued by the central bank in its efforts to crack down on the use of L/Cs in currency scams.

The net result is that Bangladesh is struggling to control inflation, and questions are being asked about the efficacy of L/Cs as a means of controlling aspects of the economy.

ADB advice

The Asian Development Bank (ADB) has advised Bangladeshi central bank to adopt a cautious monetary policy and control budgetary borrowing with more flexible exchange rates management to mitigate inflationary pressures.

The ADB in its 22 May Quarterly Economic Update said that between July 2006 and March 2007, inflation rose by 6 percentage points. Factors behind this hike include growing food and non-food inflation, high monetary and private sector credit growth, government efforts to stem rising price of essentials, high fuel prices and a considerable increase in exports and remittances.

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