Dollar crisis puts textile millers in a tight spot
The ongoing dollar shortage in the banking sector is posing a threat to local textile millers and spinners as they are in trouble in opening letters of credit (LCs) to import raw materials and cotton to feed the country's readymade garment industry.
It comes even after international retailers and brands have placed 25 per cent fewer orders for readymade garment items for the October-April season that have translated into a significant fall in orders for the primary textile sector.
Owing to the crunch of the American greenback, most of the local banks are currently taking 10 to 15 days more compared to the usual time in the case of opening the LCs. This may affect the import of raw materials such as cotton, dyes chemicals, viscose and staple fibre vital for manufacturing garment items sold in the export markets.
Also, primary textile millers, which have already seen an investment of more than $20 billion to serve the growing apparel industry, aren't running at their full capacity.
Because of the US dollar shortage driven by escalated import bills against lower export and remittance receipts, the Bangladesh Bank has tightened rules to discourage the imports of non-essential and luxury items in order to save the foreign currency reserves from fast depletion.
So, the opening of LCs aimed at importing textile fabrics declined by 25.63 per cent year-on-year to $4.88 billion in the July-December period of the current financial year, central bank data showed.
The LC opening for raw cotton dipped by 41.64 per cent to $1.02 billion. The opening of LCs to buy cotton yarn, synthetic fibre and yarn also fell sharply during the first half of the fiscal year.
Saleudh Zaman Khan, managing director of Bhulta-based NZ Tex Group, which mainly produces yarn from cotton and other man-made fibres, says before the dollar crunch emerged, banks used to take a maximum of three working days to open an LC.
Foreign banks operating in Bangladesh are taking two or three days to open LCs as they have the dollar. Local banks with a strong foundation are taking five to seven days.
"But the banks that are suffering from the shortage of US dollars are taking 15 to 20 days and in some cases, 30 days to open the LCs," said Khan. Banks, however, are prioritising export-oriented garment factories.
Khan's factory has far been immune to the dollar crunch as the garment exporter can open LCs as its bank has set aside the American greenback for it against its export receipts.
Md Abdur Rouf, executive director at Simco Spinning & Textiles, says the import of some fibre is getting delayed.
A miller has to import at least 25 per cent of the raw materials it consumes.
Owing to the raw material shortage, Simco Spinning is producing seven tonnes of yarn daily, down from its capacity of manufacturing 20 tonnes of yarn.
"We are facing two problems. On the one hand, we are facing difficulties in opening LCs. On the other hand, local garment manufacturers are delaying making payments against back-to-back LCs," said a spinner, asking not to be named.
Two distinct LCs are used in back-to-back LCs: one is given to the intermediary and issued by the buyer's bank while the other is issued by the intermediary's bank to the seller where the seller is a beneficiary. The first LC serves as the collateral for the second one.
Khorshed Alam, chairman of Little Star Spinning Mills Ltd, says he has been trying for nearly a month to open an LC worth $1.1 million to import raw materials and spare parts. The mill produces yarn to make saris and lungis to be sold during Ramadan.
"The multiplier effects of the delay in opening LCs on the local primary textile sector will be felt after three to four months if the situation does not improve soon."
Faruque Hassan, president of the Bangladesh Garment Manufacturers and Exporters Association, the apparel exporters' platform, says orders fell by nearly 25 per cent for the October-April season.
Abdullah Al Mamun, vice-president of the Bangladesh Textile Mills Association, the platform for the primary textile millers, says orders in the textile and spinning mills fell more than 25 per cent between July and December compared to a year ago.
"If the LC opening situation persists, the sector will face the crisis of raw materials," he warned.