While business in Bangladesh has been good due to the pent-up demand after the pandemic, the effects of the global inflation and price hikes from the Russia-Ukraine war is now showing in the local economy.
Bangladesh’s higher Letter of Credit (LC) confirming cost compared to the other countries’ banks has also fueled the increase in prices.
When we look at our trade and borrowing we can see delays in honouring payment commitments on the due date by our banks.
Any delay in making payments is considered as default by the counterparty. Naturally, regular delays make the market less attractive to any investor. This ultimately increases the cost of LC confirmation and discounting of trade transactions and borrowings.
Economists and experts said not only are confirmation costs rising, but borrowing costs are increasing further as well and according to them it is because of the banks' failure to make LC payments on maturity, rising non-performing loans (NPL), different banking rates fixed by Bangladesh Bank and the deteriorating condition of the banking industry.
Asked about LC confirming cost and how much dollars could be saved if the rate fell, the CEO and MD of a private bank, who preferred to remain anonymous, told Dhaka Tribune: “Unfortunately, confirmation costs are rising even further for Bangladeshi Banks, especially for payment delays and inability to make payments on due time. This is increasing borrowing costs further.
“If we assume 30% of our imports require confirmation, a 0.50% per year saving on confirmation cost will save $125 million per year.
“To tackle the situation, bankers also said that we must ensure more inflow and liquidity of foreign currency, especially the US dollar and we must encourage exports and remittances and discourage dispensable imports.”
If we compare the confirmation costs of neighbouring countries, Indian banks pay 0.50% to 0.75% per annum.; Pakistani banks pay 1.25% to 1.75% per annum; while Bangladeshi banks pay 2.00% to 3.00% per annum, which is significantly higher. But it is mentionable here that Pakistan’s sovereign credit rating is B3, three notches below Bangladesh’s Ba3.
Bangladesh's importers are paying a much higher amount than importers in other South Asian nations to confirm their LCs, thus pushing up the cost of doing business for local entrepreneurs.
Economists say that a similar cost can be saved from our private borrowing by ensuring payments on due time and improving credit behaviour. The situation is clearly diminishing a lot of the gains the country has achieved on various fronts.
Zahid Hussain, former lead economist at the World Bank's Dhaka office told Dhaka Tribune: “The extra LC confirmation cost naturally causes an expenditure of extra dollars. However, this rate depends on the international reputation, but our financial sector is suffering from an image crisis.”
“However, many developing countries have reduced these costs with good international ratings in the banking sector due to the reputation of their financial sector.”
“The best way to do this is to allow the currency exchange rate to move as per market demand and supply.
“We have seen that Bangladesh Bank promised to give it to the floating rate but, in the end, they did not do it. If they do it, then it will also allow exporters to get the best price increasing competitiveness and profitability.
“Attractive rates will incentivize our remitters as well. Moreover, this will allow the government to avoid giving huge incentives for remittance and exports, which they can use to increase the social safety net and other development work.
“The interbank market needs to operate freely with deep liquidity so that no bank fails to honour any payment commitment and we can protect and uphold the global reputation of our banks.
“We must understand that fixing BDT rate per USD at an artificially low level would be a step backwards as this means we are encouraging imports, which we should not be doing in the current scenario.”
Many countries have allowed their currency to be depreciated to address a similar situation. In the last 10 years, BDT was actually one of the strongest currencies among its peers.
During this period, depreciation in Vietnamese currency (VND) was 11%, Bangladeshi Taka (BDT) 13%, Indian Rupee (INR) 40%, Indonesian Rupee (IDR) 55%, Pakistan Rupee (PKR) 114% and Lankan Rupee (LKR) 175%.
Bangladesh’s Real Effective Exchange Rate (REER) was 116.38 as of April 2022 as per Bangladesh Bank.
“A scarcity of Dollars and the impact of Bangladesh Bank's pricing are also increasing in LCs on imported goods. If you look at the volume of trade of Bangladesh Bank in June, you will see that it is much less. In June 2015, it was 7.3 million, three days before (June 12) this figure was only four million,” Zahid Hussain described.
Economists and bankers suggest providing the right kind of incentive to the right segment to reach the demand-supply-driven equilibrium point of the USD-BDT exchange rate is the correct way to proceed given the current challenging scenario. This will also help preserve the forex reserves.
Bangladesh Bank may continue to provide liquidity support, especially for government essential commodities during liquidity stress, to avoid situations of significant volatility in the market.
However, a sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity. Sovereign credit ratings can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.
