8 days ago

Reaching growth target

Some cos adopt get-it-yourself strategy to overcome dollar crisis

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The dollar crisis has become a stubborn hindrance to growth for manufacturing companies that rely heavily on imports of raw materials but some of them have found a way to overcome it -- arranging dollars themselves.

These companies have leveraged their goodwill and business networks overseas to access the greenback so that they will not have to be at the mercy of banks while opening letters of credit (LCs) for necessary imports.

One good example is Renata. It signed a deal with the International Finance Corporation (IFC), a member of the World Bank Group, last week for a $60 million loan. This is the first time Renata is going to borrow in dollars, amounting to over Tk 7 billion at an exchange rate of Tk 118 per dollar. The loan tenure is six years.

According to company secretary Md Jubayer Alam, the fund will solve the problem of dollar crisis for the drug maker enabling it to import raw materials at ease.

Renata has to open a foreign currency (FC) account with any private commercial bank in Bangladesh with an authorized dealer licence in foreign exchange.

"The foreign currency loan will be deposited in this account and we will be able to make import payments from this account," said Mr Alam.

He said that due to the dollar crisis, banks were demanding up to 150 per cent LC margin nowadays.

LC margin refers to the percentage of the total value of a LC that the buyer or importer must deposit into the bank involved as collateral or security.

Officially, the Bangladesh Bank put in place a requirement of 100 per cent LC margin, meaning importers have to deposit 100 per cent of their total import payments while opening LCs, to discourage imports. Previously, importers could open LCs without payment in advance.

"The loan will help mitigate foreign currency liquidity risk as well as the cost of financing as the terms offered on this credit facility are favourable compared to the cost of local borrowing," Mr Alam said.

The interest rate on the loan would be under 9 per cent, calculated based on the secured overnight financing rate (SOFR) plus 3.5 per cent, which is lower than the current lending rates in the local market, exceeding 13 per cent.

Bangladesh's gross forex reserves fell to $21.79 billion as of June 30 this year from a record $48 billion in August 2021.

The government secured $4.7 billion in loans from the International Monetary Fund (IMF) last year to build up a cushion against falling reserves though the global financial support provider presented some tough conditions to meet. The IMF has already disbursed the third tranche of the loan package.

However, the dollar crisis is still prevalent. Banks rarely agree to open LCs and often negotiate a higher-than-market rate with businesses that desperately need imported raw materials to keep their production running.

Around 85 per cent of the raw materials used by the pharmaceutical companies are imported, mostly from India, China, and Japan.

Last month, Renata exported its first shipment of Terbinafine tablets to the UK market. With the new types of drug shipment, the export basket of Renata increased to 17 products for the UK market.

The drug maker also started exporting medicines from April this year to the US market, becoming the sixth pharmaceutical manufacturer from Bangladesh to directly ship products to the world's largest market.

To attain the export targets and to meet the local demand, Renata will need an increasing supply of raw materials from abroad. The foreign loan will help ensure that.

In April last year, Berger Paints Bangladesh signed an agreement with its parent company J&N Investments (Asia) to avail of $60 million in loans to meet the needs for import payments.

Robi, the country's second-largest mobile operator, also received a $55 million loan in July last year from its parent company Axiata Group, a Malaysian multinational telecommunications conglomerate, for three years.

Robi said the loan was taken as a precautionary measure to avoid any potential impact of the depletion of the country's foreign exchange reserves.

The availability of dollars will support Renata, Robi and Berger in maintaining their growth trajectory whereas many local companies have complained that their profits plummeted in recent quarters due to their failure to procure raw materials.

Most of the sectors that require imported raw materials said the inability to import hurt their production of goods.

Meanwhile, prices of raw materials fell in the global market but local companies could not take advantage of that because of the unavailability of dollars.

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