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The puzzle of rise and fall in capital machinery imports

Rejaul Karim Byron
Normal reasoning suggests capital machinery imports would plummet when a country is in the thick of political turmoil and shoot up when normalcy returns. That logic is found flapping when it comes to Bangladesh.
In the first month of the current fiscal year, letters of credit settlement, which give an indication of the amount of imports, for capital machinery and industrial raw materials fell in comparison to a year ago.
LC openings, which signify the import orders being placed, too saw a decline.
In July, LC settlement for capital machinery slid 12.58 percent year-on-year and LC opening 8.88 percent. LC settlement for industrial raw materials also dropped 11.42 percent.
The picture was totally the opposite in July last year, when LC openings soared 62.45 percent year-on-year and settlements 21.03 percent. It was the same story for industrial raw material imports.
Political instability marked the whole of 2013, with the situation aggravating in May, when Hefajat-e-Islam activists defaced Motijheel, the country's business hub. Subsequently, the
investment climate took a gloomier turn for the rest of the year.
Huge excess liquidity also piled up in banks.
Economists expressed apprehension over the sudden spike in LC openings and settlements for capital machinery imports. In other words, they said money was being laundered abroad via formal and informal channels.
Furthermore, the difference in dollar rate between the official and unofficial markets was more than Tk 4 at the time, which, right now, is only Tk 1.6.
"It is difficult to explain why capital machinery imports dropped now and rose when the political turmoil was gaining steam," Zahid Hussain, lead economist at the World Bank Dhaka office, said.
Investors could not have been moving on with the implementation of their investment plans when the immediate political horizon was "totally cloudy".
It is possible that precisely because of the turmoil and uncertainties about when and how it will be resolved, nervous holders of surplus money were moving their funds to safe havens by over-invoicing or misinvoicing their capital machinery imports, he said.
The difference between informal market exchange rate and the formal market exchange also widened at that time in 2013, which suggests that demand for foreign exchange in the informal market then was stronger as a result of the tendency to move money out.
Such tendencies have likely weakened considerably in July this year, even though political uncertainties have not folly dissipated, he said, adding that the uncertainty prevailing now is different in order of magnitude than what the country experienced in the last half of 2013.