Low import of capital machinery to strain investment, employment

The capital machinery imports have dropped drastically in the country as the importers have long been struggling to open letters of credit (LC) to bring commodities from abroad. 

There has been a massive 67 per cent decline in LCs for capital machinery import in the first seven months (July-January) of the current 2022-23 fiscal year, compared to the previous year’s corresponding period. A similar scenario was seen in the rate of LC settlement. 

Traders said a decline in capital equipment imports means a decline in new investment in the industry. It brings down industrial production and hits the employment sector hard. When there is no increase in industrial investment, there will create no new employment.   

According to the latest central bank report, the import of capital machinery in the July-January period of the current fiscal year stood at USD 1.41 billion, which is 66.83 per cent less than imports involving USD 4.25 billion in the same period of fiscal year 2021-22. 

The industrial investments came to a standstill in 2020 due to the Covid-19 pandemic. But it rebounded strongly in the following two years thanks to the increased demand triggered by eased-up pandemic restrictions. The traders imported a record amount of capital machinery in 2021 and the first half of 2022. 

Again, the imports took a hit from the global unrest ensuing from the Russian invasion on Ukraine. As the dollar crisis turned acute in the banking sector, the authorities imposed different sorts of restrictions on imports, putting all the importers in a tight corner. 

Big companies enjoyed special privileges in opening LCs through their own channels, but the medium and small importers suffered the most. Almost all industrial sectors took a hit from the adverse import situation. 

In the heavy and large-scale industry, the textile sector registered a 77 per cent drop in LCs for capital machinery imports while the readymade garments sector witnessed a 67 per cent decline. Besides, there was a 56 per cent fall in the leather sector’s capital machinery import, 58 per cent fall in the jute sector, 40 per cent fall in the pharmaceutical sector, 77 per cent fall in the packaging sector and 66 per cent fall in other sectors. 

The capital machinery imports stood at USD 90 million in the textile sector and at USD 420 million in the readymade garment sector in the July-January period. The pharmaceutical industry recorded LCs of USD 70 million during the period. LCs of leather, jute and packaging sectors did not exceed the USD 10 million mark. LCs of all other industrial sectors totaled at USD 1.08 billion.

Most of the imported capital equipment is used in the export-oriented garment and textile sector. Due to the Russian onslaught on Ukraine since February last year, the purchase order in readymade garment factories has been low and it almost stalled new investments in the sector. .

The fuel price hike and subsequent crisis posed another challenge to the businesses.

Abdullah Al Mamun, vice president of Bangladesh Textile Mills Association (BTMA), said banks are not opening LCs for importing capital machinery and are even delaying to settle the old LCs citing the dollar crisis. It is a big impediment to new investments and employment.

He also said the authorities should keep capital machinery LCs uninterrupted as the heavy industry requires a constant upgradation in its machinery. If not, the production gets hampered. In some cases, there are obligations to install new machinery to get foreign purchase orders.

According to Bangladesh Bank, the rate of LC settlement went down by 7.5 per cent in the July-January period of FY23, comparing to the previous year's same period. Other than capital machinery, the number of LCs for industrial raw material import also decreased by 27 per cent. 

It means the industrial production is also decreasing, along with investment in heavy industry. It led to low raw material consumption. 

Meanwhile, there has been an overall 44 per cent drop in LCs for importing diesel engines of ships, computer parts, automobile parts, bicycle spare parts, power tillers and other electronic parts in the first seven months of FY23. Such LCs were USD 2.56 billion in the previous year’s first seven months and it declined to USD 1.42 billion this year. Also, settlement of such LCs dropped 23 per cent. 

Bankers said opening LCs involving large import bills requires reporting to the Bangladesh Bank. In many cases, the commercial banks are opening large LCs, but the central bank is holding them up. Also, many banks limited the number of large LCs. All these issues have eventually translated into a decline in capital machinery import. 

Mejbaul Haque, spokesperson of Bangladesh Bank, said there has been a large investment in the country after the pandemic-induced fallout. It is a general scenario that a year of healthy investment is followed by one or two years of low investment. The scenario does not remain the same always.  In addition, there is an ongoing global crisis and the investors are seemingly reluctant to take an extra risk. This is why LCs for capital machinery import dropped, he claimed. 

The research director of the Centre for Policy Dialogue (CPD), Khondaker Golam Moazzem, suggested that the government take initiative to ensure that the current situation does not linger long. 

“Although the capital machinery imports decreased, there is little risk of a major problem in the current reality. But the worrisome issue is that the investment will suffer if this situation continues for long. The issue cannot be overlooked as it is related to the export and domestic market demand,” he said, adding the authorities should keep a cautious eye so that investment and employment are not hampered.