The Financial Express

Savings in import payments -- way out

| Updated: January 16, 2022 21:58:21

Savings in import payments -- way out

Import trade of the country is guided by Import Policy Order in force issued by the government. Purchase of goods from external sources is referred to as imports. Goods purchased under import framework constitute different components -- price of goods, transport cost, insurance premium, duty and taxes and many more. Payments for imports are routed either to suppliers for all components or to suppliers for goods price, carriers for transport cost, insurance companies for premium against risk coverage, customs authorities for duties and taxes, and many more involved in the process.

Where costs will go depends on the terms used for the transactions. The terms are officially known as incoterms. There are 11 terms available in the ICC (International Chamber of Commerce) publication named as Incomterms-2020. Most common terms are FOB (free on board) and CFR (cost and freight). Under FOB term, importers pay the price of goods to exporters, which do not include transport cost and insurance premium. Transport cost and insurance premium are settled by importers with carriers and insurance companies separately. In CFR terms, importers pay exporters the price of goods and the transport cost together, and insurance premiums paid to insurance companies.

Bangladesh is open to external sectors in many respects for exports, imports, physical presence, finance and investment. In the context of our export, foreign buyers nominate carrier companies for shipping arrangements. The incoterm they use is FOB. Under the arrangement, foreign buyers make payments of only the price of goods to exporters in Bangladesh. They pay transport cost to carriers for which they negotiate separately.

In respect of imports by Bangladesh, import is conducted on CFR terms in many cases. Under the arrangement, importers make payments of the price of goods and the transport cost to foreign suppliers together. Importers are in dark regarding the cost included in the price of goods for transportation. Central bank prepares balance of payment taking external transactions into consideration. FOB value is extracted from CFR price to measure balance of trade - difference between value of export and import. The process is known as an assumption practised globally but such determination does not reflect real FOB value of goods. Real view is found if import is executed on FOB.

As said earlier, export from Bangladesh is executed on FOB term, transportation against the shipment is managed by importers. Why importers take the hassles relating to transportation is a question. The simple answer is that importers can save transport cost by negotiating with carrier companies against import under FOB term. As such, it becomes cost effective to importers compared to import under CFR term. Definitely, Bangladesh can gain same benefits if all imports are converted to FOB term instead of CFR.

Shipping is an industrial sector under which different carrier companies like shipping lines, airlines work. With regard to payment procedures, transport cost can be made to carrier companies operating in Bangladesh. Foreign carriers can remit their surplus funds, net of local expenses including taxes, to their parent companies abroad.

In addition to mainline operators like shipping lines and airlines, freight forwarders and multimodal transport operators play a major role in cross border transportation. These operators can receive freight charges against FOB imports from importers and they can remit payable amounts to their counterparts abroad as per foreign exchange regulations. Freight against import through chartered ships is also permissible for outward remittance to ship owners abroad.

Due to policy support on outward remittances, besides mainline operators, by freight forwarders and multimodal transport operators, it is reported that import on FOB term is on rise. Insider information shows that backward linkage industries supporting export sector execute bulk imports on FOB term either through liner ships or chartered ships.

Our yearly trade volume is around 100 billion US dollars. In case of import under FOB term, other costs are involved on account of transport cost. If we were in possession of physical carriers like ships and aircrafts, huge income would be earned as freight charges. Surely such positive situation will come one day. Before that situation, dependence on foreign carriers is inevitable. Despite this, cost can be saved if import is executed on FOB term as foreign buyers do in case of their imports from Bangladesh.

As stated earlier, import trade is guided by Import Policy Order in force. The Order allows all terms except CIF, CIP and DDP. In case of import under CIF and CIP terms, permission from the concerned ministry is needed. There are valid grounds behind the regulatory restriction to use these terms. But whether it is possible to implement FOB import administratively is a question in the age of open market economy. This is one of the challenges.

There are many other challenges for full-fledged introduction of FOB imports. Small importers will not be in comfort to import on FOB term due to absence of shipping management capacity at their ends. Exporters importing under back to back imports cannot go for FOB imports because of nominated suppliers and risk factors associated with delay in shipping management which will jeopardise shipment deadline. However, efficient shipping management can help FOB imports, credit support in this case is required to make payments of transport cost out of export proceeds. Back to bank letters of credit facilities for freight charges are in need for encouraging FOB imports.

In addition to commercial imports of finished goods, bulk imports are required for import substitution of domestic industries. Such bulk imports are easily possible to be executed on FOB term. On the other hand, FOB term can easily be imposed on commercial imports of finished goods administratively.

The positive impact as said earlier is cost savings, if import is made on FOB term. But it is not possible to introduce the term overnight. There is need for policy support in different aspects. Rebate on import duties may encourage importers to use FOB term. FOB imports are also possible provided that under buyer's credit facilities in foreign currency are allowed for settlement of freight charges.

To extend policy supports, Import Policy Order needs to be revisited with regard to the use of incoterms for import trade. FOB, like other terms needs to be made mandatory for import of commercial goods. In this case, a threshold can be set so that small importers are not affected. Bulk imports for industrial uses can be brought under FOB term with support for settlement of freight charges under buyer's credit in foreign currency. In addition to private imports, many government agencies or their nominated agents execute imports like fuel, food items etc. Imports by government should also be made mandatory on FOB term. In case of import under external loans, agreements should be made in such way so that space is available to importing entities for negotiation of freight cost.

What is saved is treated as income which helps to generate employment. A simple provision to be incorporated in the policy framework may lead to save import costs to a greater extent, which will result in development of shipping industries in the long run. Before that, activities by shipping agencies for handling of FOB imports will set motion to generate employment. The scope as noted herein can be reviewed at policy levels for revisiting trade policies and their supporting policies such as regulations on foreign exchange, customs, and relevant other ones.

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