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Banks issue fewer LCs as importers cut orders

  Traders have become nervous of the constant upward movement of US dollar in recent months


KATHMANDU: Banks are issuing fewer Letters of Credit (LC) for imports as the strong dollar has compelled importers into postponing import orders.

Since importers have become nervous about the constant upward movement of the US dollar, they are refraining from making orders or have reduced the order size.

The US dollar has appreciated by almost 25 per cent against the Nepali rupee in the last four months — making foreign products expensive by 25 per cent. Country’s ever swelling import bill can also be expected to contract if imports go down.

For Dashain sales, most importers are almost done with placing orders.

“But this year, importers have reduced the order size because the strong dollar has made imports expensive,” pointed out former president of Nepal Foreign Trade Association Akhil Chapagain.

“Order placement has reduced by almost 15 to 20 per cent. Moreover, even in the already committed order, importers have reduced the quantity to be shipped — instead of three containers only one container is being ordered at present,” he added.

Importers are refraining from supplying more in the market because they anticipate a reduction in demand for non-essential goods due to increased price. “Most of us are in wait-and-watch mode to take relatively longer term decisions,” said Chapagain, who imports a range of consumer goods.

The reduction in import orders has also started to be felt by banks of late for importers are asking for fewer Letter of Credit issuance along with the decrease in Trust Receipt loans. Payments for imports exceeding Rs 20 million has to be made through Letters of Credit issued by the commercial banks.

“The entire market is reacting nervously to the strong dollar, as it has also affected LC issuance because importers are willing to wait,” said CEO of Commerz and Trust Bank Nepal Anal Raj Bhattarai.

“Most importers have asked banks for forward cover — that is arrangement to buy dollars at the current price at a future date,” he said, adding, “As they are trying to mitigate the risk

of dollar further getting stronger, they are willing to pay the current rate rather than take chances.”

Normally by issuing LC, a bank makes payments to suppliers on behalf of importers. Banks then issue short-term loans such as Trust Receipt (TR) loans to importers to recover the payments made.

As the dollar started to shoot up since mid-April, the amount of Trust Receipt loans has actually come down. By mid-April the amount of Trust Receipt loans issued by financial institutions stood at

Rs 43.4 billion, which came down to Rs 42.5 billion by mid-June when the US dollar shot past Rs 90.

“LCs for imports of consumer goods have declined a bit of late,” said CEO of Rastriya Banijya Bank Krishna Prasad Acharya, adding “But imports of raw materials, fertilisers and construction goods might not be affected much because the demand for these commodities cannot be postponed.”

It takes anything between one to three months for importers to place an order, get LC issued, ship and deliver the goods and get customs’ clearance. The continuous rise of dollar since the past four months will affect the import bill of the country.

Despite the threat of price rise, the strong dollar might actually help reduce the ever widening trade deficit. Nepal’s trade deficit stands at Rs 480 billion, with imports of Rs 505 billion by the end of last fiscal.

The rate of import growth can be expected to not rise as it did last fiscal, if import of non-essential consumer goods is reduced. The effect will be visible in the first month’s macroeconomic report which is yet to be made public by the central bank.

On the other hand, revenue administration has already started to feel the burn of slow paced imports as collection of value added tax (VAT), customs duties and excise duties fell behind the state’s expectation in the first month of the current fiscal year.

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