The opening of letters of credit (LCs) for imports fell sharply in the first two months of the financial year 2024-25, primarily due to widespread unrest across the country.

Data from Bangladesh Bank reveals a 13 percent decline in LC openings, dropping to $10 billion in July and August of FY25 compared to $11.51 billion during the same period in FY24.

Business activities came to a halt in July as government-imposed restrictions were enacted amid nationwide protests calling for reforms to the government job quota system.

The Anti-Discrimination Students Movement, which led these protests, intensified its actions from July 1, resulting in a nationwide curfew and an internet blackout starting July 19.

The unrest only began to subside after Prime Minister Sheikh Hasina resigned on August 5 and fled to India, ending her 15-year tenure.

The political instability in July, followed by the uncertainty after her departure, led many businesses to suspend operations due to fears of prolonged unrest, according to bankers.

LC settlements also saw an 8.29 per cent decline, falling to $10.34 billion in July and August of FY25, compared to $11.89 billion in the same period of the previous fiscal year.

Despite the central bank’s restrictive measures and an ongoing dollar shortage, LC openings for imports had slightly increased in FY24, reaching $68.69 billion, up from $68.24 billion in FY23.

This increase occurred despite a severe dollar crisis and a dwindling foreign exchange reserve, which raised concerns among bankers.

LC openings in the first half of FY24 (July-December) totaled $32.92 billion, compared to $34.78 billion in the same period of 2022.

The rise in LC openings prompted the Bangladesh Bank to sell dollars from its reserves.

Over the past 32 months, the central bank has sold more than $30 billion from its reserves.

As a result, gross foreign exchange reserves, according to International Monetary Fund guidelines, fell below $20 billion on September 11.

This depletion in reserves is causing concern for both the government and the central bank.

One immediate consequence is the pressure on the Bangladeshi currency, the taka, which has depreciated against the US dollar, reaching Tk 120.

The exchange rate was Tk 84.81 in June 2021, Tk 93.45 in June 2022, and Tk 106 in June 2023.

The sudden sharp increase in the dollar price has created turmoil in the industry, significantly raising business costs and discouraging businesses from opening LCs.