Capital machinery imports on the mend

Capital machinery imports are recovering slowly as concerns over political uncertainty ease and banks show more willingness to facilitate investments amidst increased liquidity in terms of US dollars and stability in the exchange rate.

During the July-January period of this fiscal year (FY), LC openings for capital machinery grew three percent year-on-year to $1,557 million, according to Bangladesh Bank data.

Mohammad Ali, managing director and chief executive officer of Pubali Bank, said the availability of dollars had increased. "We are also seeing stability in the exchange rate. Political stability is also giving impetus to investors," he said.

However, businesses and analysts said the recovery does not mean that economic challenges are over.

Bangladesh opened letters of credit (LCs) worth $3,900 million to import capital machinery in the July-January period of FY2021-22 as investors rushed to invest following the easing of Covid-19 restrictions.

However, imports of capital machinery plunged 61 percent in the following fiscal year, touching a five-year low in face of a US dollar crisis and the central bank's move to restrict imports.

"A slight increase in LC openings seems positive primarily, but it is not yet time to say that the overall economy is rebounding," said Khondaker Golam Moazzem, research director of the Centre for Policy Dialogue.

He feels it can be considered the economy is moving forward if this trend continues for the next few months.

Moazzem said as the local currency weakens against the US dollar, investors have to spend more to import capital machinery and industrial raw materials. Besides, the dollar crisis is still prevalent, he said.

"If the local currency strengthens against the greenback in the coming days, there will be a positive impact on the country's overall economy," he said.

Imports of raw materials in most industries are still declining. Unless that changes, the economy will not accelerate, he noted.

However, he believes the marginal increase in capital machinery imports was a positive sign amidst the increase in US dollar price this year.

According to industry insiders, they opened LCs at the rate of Tk 105 to Tk 106 per dollar and settled at them at Tk 112 in the last fiscal year. But now, they are opening LCs at Tk 111 per dollar and settling them at Tk 122 to Tk 125.

"The growth in LC openings is a positive sign for the economy despite the economic stress," said Mohammed Amirul Haque, managing director of Premier Cement Mills PLC.

He also advocated to fix imports of consumer goods during moments of crisis.

Bangladesh imports foreign fruits at the cost of millions of dollars, which is unnecessary at this moment, he said, adding that the pressure on the forex reserve would reduce if LC openings for such imports could be limited.

He added that importing fish from abroad is ridiculous considering that Bangladesh is one of the leading countries in terms of fish production.

"How can we say that there is no under-invoicing behind it?" he questioned.

He also said the contractionary monetary policy of Bangladesh Bank should continue in order to keep the economy on the right track.

Asif Ibrahim, chairman of the Chittagong Stock Exchange, said the economic situation that Bangladesh is facing does not have a quick remedy.

"No policy can fix it overnight," he said.

Fixing it would require some time-bound policies and compliance-related actions, he said, adding: "Income tax reform is needed. The strategy needs to be designed to attain 50 percent tax from this segment."

Dependency on indirect taxes, such as VAT, is now over 70 percent and this needs to be reduced to 50 percent, he said.

According to him, the VAT and Supplementary Duty Act 2012 needs to be revisited to free the VAT mechanism from cascading effects.

Total VAT incidence must be kept at 15 percent, but due to ineffective VAT credit mechanisms, sometimes the effective VAT rate is set above 30 percent, he noted.

The interest rate corridor based on the Six-Month Moving Average Rate of Treasury Bills (SMART), has increased the interest rate, he said.

There should be a circuit breaker for the rate of treasury bills, otherwise, the economy may face an unusually overheated situation, Ibrahim added.

Ferdaus Ara Begum, chief executive officer of Business Initiative Leading Development (BUILD), said there is no way to understand whether the economy is recovering based solely on increasing capital machinery imports.

If other indicators are positive, then the economy can be considered to be moving towards improvement, she noted.