Bangladesh Bank offers special facility to curb price hikes of 10 commodities ahead of Ramadan
Bangladesh Bank (BB) has instructed banks to keep cash margin requirements at the minimum level, based on banker-customer relationships, when opening letters of credit (LCs) for importing 10 essential commodities, including edible oil, sugar, chickpeas, onions and dates, ahead of the upcoming month of Ramadan.
The central bank said the initiative was aimed at facilitating imports of essential consumer goods and keeping market prices within an affordable range. If price increases can be prevented, consumers will be able to buy these commodities at relatively resonable prices.
Bangladesh Bank issued a circular in this regard on Sunday and sent it to the managing directors and chief executive officers of all scheduled banks in the country.
The circular said the directive, issued under the authority granted by Section 45 of the Bank Company Act 1991, would come into immediate effect and remain valid until 15 March 2027.
Which commodities are covered?
The 10 commodities for which the central bank has instructed banks to keep LC margins at the minimum level are rice, wheat and flour, onions, lentils, edible oil (soybean and palm oil), sugar, chickpeas, peas, spices and dates.
Banks have also been advised to give the highest priority to opening LCs for imports of these commodities to ensure adequate and uninterrupted supplies in the domestic market.
What is an LC margin and how does it affect imports?
Simply put, an LC margin is the amount of cash or security that a trader or importer must deposit with a bank when opening a letter of credit for imports. It is generally calculated as a certain percentage of the total LC value.
For example, if the margin is 100 per cent, the importer must deposit an amount equivalent to the full value of the import to open the LC. If the margin is kept at a minimum or relaxed, an importer can open an LC by depositing a much smaller amount of cash, depending on the relationship with the bank and the available capital.
A lower cash margin requirement when opening LCs reduces pressure on traders' own capital. As a result, many importers, including small and medium-sized businesses, can import larger quantities of goods more easily. This helps increase market supplies and keep prices under control.
On the other hand, if the cash margin is set at 100 per cent or a high rate, a large amount of traders' cash remains tied up with banks. This reduces importers' ability to open LCs, potentially lowering market supplies and creating artificial shortages, with the risk of sharp price increases.
Why does demand rise during Ramadan?
Every year, demand for essential commodities such as chickpeas, lentils, edible oil, sugar, spices and dates increases several times during the holy month of Ramadan compared with normal periods.
Eating habits change during Ramadan. Iftar and sehri meals often include items such as chickpeas, peyaju (onion fritters), beguni (aubergine fritters), fruit drinks and sweets. As a result, consumption of edible oil, sugar, chickpeas, lentils and spices increases.
Large-scale iftar parties are also organised by families, corporations and various institutions during the month, creating additional pressure on wholesale and retail markets.
Consumers also tend to buy larger quantities of certain commodities at the beginning of Ramadan and store them at home. This common practice creates a temporary surge in demand in the market.