Bangladesh’s foreign exchange reserves have recovered and the dollar shortage that rattled businesses last year has largely eased, but the country is struggling to attract fresh investment as industrialists warn that political uncertainty, high interest rates, energy shortages, and bureaucratic red tape continue to stifle growth.
Despite remittance inflows remaining robust and the central bank gradually easing import restrictions on industrial machinery and raw materials, import payments for capital goods have fallen sharply, signaling a slowdown in business expansion and new industrial projects.
Economists and business leaders say structural and policy challenges, rather than a lack of liquidity, are holding back the private sector, leaving the country’s economic recovery fragile ahead of next year’s general election.
Data from Bangladesh Bank shows that import Letter of Credit (LC) settlements in August fell to $4.88 billion, down 11% from the same month last year, primarily due to reduced imports of capital machinery – an indicator of slowing business activity and new investment.
In the first two months of the current fiscal year (July-August), LC settlements for capital machinery imports declined by 11.87%, even as the issuance of new LCs increased slightly by 0.72%.
On the other hand, the central bank has invested heavily to restore reserves, which now total $31.27 billion gross and $26.39 billion under the IMF’s BPM6 standard – approximately $5 billion higher than a year ago.
Dr Mustafa K Mujeri, executive director of the Institute for Inclusive Finance and Development, told the media, “Investment remains in a negative state. The current situation is not investment-friendly. Social and political conditions are unstable. In such a scenario, investors are neither expected to be encouraged nor are they showing any signs of optimism.”
He added that growth in capital machinery imports and private sector loans has fallen to its lowest levels, with the trend clearly visible even in Export Processing Zones (EPZs) and special economic zones.
Dr Mujeri stressed, “Until a political, democratically elected government takes responsibility, there will be no improvement in the investment climate. Elections are scheduled for next February, and if a participatory and widely accepted government is formed, I hope the investment situation will improve.”
Business leaders cite systemic hurdles
Mohammad Hatem, president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), said, “Investment cannot increase just with adequate foreign currency. Continuous electricity and gas supply and consistent policies are essential. Entrepreneurs will not take risks without these. The biggest problem now is the banking sector. Accessing loans is difficult, imports and exports are delayed, followed by customs harassment and energy shortages. Until these are resolved, investment will not pick up.”
Shams Mahmud, president of the Bangladesh Thai Chamber of Commerce and Industry, added, “The dollar shortage has eased, but high interest rates have reduced interest in setting up new industries. Sustainable growth requires an investment-friendly economic environment.”
Banks remain cautious
Banks are increasingly cautious in approving LCs, following past instances of money laundering and fraudulent bills that caused a surge in non-performing loans.
Currently, banks approve LCs only for financially sound and verified companies, imposing full margins and additional charges. Entrepreneurs are reluctant to open LCs due to rising interest rates and costs.
Import financing, which was available at 9% interest until June 2023, now ranges from 14%-18%, with extra bank charges, and banks also pass on the cost of higher dollar purchase rates, significantly increasing import expenses.
Supply up, demand low
Between fiscal 2020-21 and 2022-23, Bangladesh Bank sold more than $25 billion from reserves to meet import bills and contain exchange rate volatility, with the rate surging from Tk85 to Tk122 per dollar amid the Russia-Ukraine war.
Since July this year, the central bank has reversed this strategy, buying over $1.7 billion in auctions as dollar supply now exceeds demand.
Bangladesh Bank spokesperson Arief Hossain Khan said, “Dollar supply in the market exceeds demand, which is why the central bank has been buying dollars.”
In response to the 2022 dollar crisis, Bangladesh Bank imposed measures including 100% cash margins, higher tariffs, and a suspension of bank loans for imports.
While reforms after August 2024, including a market-based exchange rate, have eased the crunch and boosted reserves, many restrictions remain.
Officials confirm that a 100% cash margin is still required for motor vehicles, electronics, luxury goods, and even ready-made garments, and bank financing for these items remains suspended.
Syed Mahbubur Rahman, former chairman of the Association of Bankers, Bangladesh, welcomed the market-based rate but called for full liberalisation.
He said, “The dollar crisis has eased temporarily. Removing all remaining import restrictions would reinvigorate economic activity and reveal the real market value of the dollar. In an import-dependent economy like ours, the declining trend in LC openings is dangerous. The government must quickly resolve political uncertainty and restore business confidence. Otherwise, even with ample dollar flows, the economy will not thrive.”
Courtesy: Daily Sun.
Bd-pratidin English/TR
