Roaring dollar hits local producers

Bangladesh's entire business sector, particularly the producers focused on the domestic market, is facing troubles due to an unprecedented hike in the US dollar price as their cost of production has witnessed a sharp spike. 

This is because businesses are now having to settle import bills by buying each American greenback at Tk 108 whereas they opened letters of credit when the US dollar was trading at Tk 84 to Tk 86, a jump by at least 28 per cent.

The dollar has strengthened against most currencies because of the interest rate hike by the US central bank to fight runaway inflation, the Russia's war in Ukraine, and global sanctions on Russia. Currently, it is at its strongest level in two decades.

In Bangladesh, by contrast, the local currency has lost its value by at least 21 per cent on the interbank foreign exchange market, driven by a shortage of US dollars after import bills rocketed to feed an economy rebounding from the coronavirus pandemic.

The soaring US currency has made the import of most of the world's commodities, priced in dollars, dearer, thus directly hurting the producers that are reliant on external markets for raw materials whether they are in the pharmaceuticals, paper or steel industries.

In fact, almost all industries in Bangladesh are dependent on imported raw materials, so their cost of production has increased abnormally in the last six months due to the continuous increase of the dollar price.

Partex Paper Mills Ltd, a subsidiary of Partex Group, opened LCs at Tk 86 against per dollar to import pulp six months ago. The company is now settling them at Tk 107 to Tk 108.

"This means we are settling LCs paying Tk 20 in addition for each US dollar. This has raised the cost of our production," said MM Nurun Nabi, general manager of the paper manufacturer.

The price of printing paper rose to Tk 120,000 to Tk 125,000 per tonne from Tk 85,000 six months ago. The price of pulp, the raw materials used by the paper industry, has risen to $970 per tonne from $560 earlier.

Bangladesh needs around 12 lakh tonnes of printing paper every year. This means the industry will have to spend an additional Tk 4,800 crore if producers have to settle LCs at the current rate of the dollar, according to an estimate of Nabi.

Likewise, the pharmaceutical industry, another heavily import-dependent sector, is facing difficulties as the price of raw materials has gone up internationally. As a result, the industry has had to spend 20 per cent more in order to keep their manufacturing facilities up and running, said industry people.

The cost of raw materials in the steel industry has surged by 30 per cent, forcing manufacturers to adjust the prices of the finished products.

Industry people say sales have fallen by an average of 50 per cent to 2.5 lakh tonnes per month as consumers, who have been hit hard by higher inflation, are unwilling to pay higher prices for the key construction material.

"In fact, all of the sectors that are depended on imported raw materials are feeling the heat of the rising dollar," said Md Shahidullah, managing director of Metrocem, a cement manufacturer.

Shafiul Athar Taslim, director for finance and operations of TK Group, one of the top commodities importers and processors, said it has had to pay an additional 30 to 35 per cent to clear bills against the LCs opened six months ago.

The group sold the commodities in the local markets by considering the cost of the USD at Tk 85-Tk 86.

"But we have to buy the US dollar at Tk 107-Tk 108 to clear import bills," he said, adding that it processes and sells the commodities within three-four months after opening the LCs. 

Car importers say earlier, they could bring in automobiles by making a payment of 5 to 10 per cent as a margin of the total LC value. Now, the margin has gone up to 100 per cent as the government is discouraging the foreign purchase of luxury items to stop the depletion of international currency reserves.

Reserves stood at $36.44 billion on September 28, down 6.7 per cent from August 31 and 21.25 per cent from a year ago.

"This means we need more capital now to run businesses," said Mohammad Shahidul Islam, secretary general of the Bangladesh Reconditioned Vehicles Importers and Dealers Association.

The surging dollar is particularly proving painful for the importers who are focused on the domestic market since they don't have much room to pass the additional cost on to consumers amid higher price pressures.

In contrast, businesses that are involved in both import and export can offset the cost since they are also getting higher rates for their export receipts. Banks are paying Tk 99 to exporters for each dollar.

"The US dollar has strengthened against almost all currencies in the world, not just our currency," said Kazi Iqbal, a senior research fellow of the Bangladesh Institute of Development Studies.

He said that businesses that deal with essential items would not face major problems since they can pass on the costs as demand for such goods stays high even during uncertainties.

But the businesses that import and sell non-essential items and luxury goods face the heat as sales slump since people tighten their belts whenever they come under deep uncertainty like they are currently in.

The expansion plan of the domestic market-oriented businesses also suffers a setback when sales drop.

The pain for businesses caused by the roaring dollar might not be over any time soon because the war shows no sign of coming to an end while the Federal Reserve of the US expects more interest rate hikes this year.

"And until the war and related uncertainty are over, importers and domestic market-oriented businesses will continue to witness stress," said Iqbal.