Trade is executed in terms of international rules and norms. Despite, domestic regulations are required to be observed for cross border trade transactions. In respect of generally accepted norms, trade is effected in different ways - cash in advance, letter of credit (LC), documentary collection, open account. In case of cash in advance, payment is made before on boarding the shipment, under this method exporter is in better position. Importers face commitment risk from exporters. Banks on behalf of importers make commitments to make payments against compliant documentation under LC method. This is a win-win situation both for exporters and importers. Documentary collection is of two types - document against payment, and document against acceptance. Of these two, banks release documents against importers' acceptance under the method of document against acceptance. In case of default in payment on maturity, importers' banks do not bear any responsibility. Under open account, banks provide transactional services without taking any risks. Trade is executed in terms of underlying arrangements between exporters and importers. Payments are settled accordingly. Exporters are supposed to arrange factors to receive payments before maturity under open account method. In this case, exporters' banks can work as factors for which they take exposure on importers' factors. Early payments are effected at the cost of exporters. This is a supportive method for importers.
The above ones are international practices followed by all countries. In addition, trade needs to observe local regulations. In case of Bangladesh, there prevail some binding rules under foreign exchange regulations. These are: exporters need to declare to customs authority what is to be exported in details, transport documents are to be issued in the names of designated banks, foreign agent commission up to a certain limit can be adjusted with export proceeds, different charges like bank charges, swift charges, discounting charges, etc. are permissible, export proceeds are required to be repatriated within 120 days from the date of shipments, etc.
Considering different charges, adjustments are necessary with gross value of declaration. As a result, the declaration does not reflect true value. It is observed that FOB (free on board) value of exportable items is declared by exporters on a format known as EXP Form. It is a form containing no field to declare what is to be deducted from the declared value. As a result, gross value is declared officially. This is basically misleading information if gross value is disclosed.
Bangladesh trade is to face a peculiar framework. Once export was executed on sight basis and procurement of inputs contents was sourced under credit terms. Transactions were said to be executed through LCs. The model is found changed during for more than a decade. In the present situation, export is executed on credit terms meaning that exporters wait for payments till maturity. During the waiting time, they can realize the payment from foreign banks, financial institutions under supply chain finance at their own cost. There is a ceiling limit by which exporters can discount export bills. In the current situation, the cost is reported to be very high. In procurement of input contents for processing of export orders, exporters are rare to avail credit facilities. They need to pay at sight. It is not possible to pay before realization of export proceeds. As such, exporters are to borrow foreign currency loans from external sources or from offshore banking units. This requires cost which is borne by exporters. In both cases, exporters need to absorb costs. Moreover, exports are not executed on LC method. Exporters receive purchase orders. In case of cancellation of orders at production process, exporters are to face huge loss.
The costs as noted earlier as discounting cost for early repatriation and financing cost for inputs procurements at sight are an extra burden on exporters. The paradox is that export proceeds are received after adjustment of different charges.
The charges are admissible as per business insiders. Despite, exporters are blamed for not repatriating full value of exports. Export proceeds are repatriated in shortage due to bonafide deductions. In the same way, opposite issue can be cited. Import price is presented and disclosed at FOB value. But it is not the actual value importers need to pay. The value should be added with interest which is required to be paid at sight. The interest is deemed to be accounted by importers in cost of inputs procured. Declaration of FOB value of import payments does not reflect true view. It is a question if interest payments should be added or not. It is better if interest payments, freight and other charges are separately disclosed along with FOB value of imports.
In the above phenomenon, it becomes clear that Bangladesh is not in favorable position in cross border transactions. Insider information indicates that exports are executed through sales contracts but imports are rarely executed on such mode. Foreign suppliers require LCs. Back to back LCs are found in practice against sales contracts. Back to back sales contracts are not acceptable by foreign suppliers. This is a peculiar situation.
Bangladesh is a business hub for import LCs. There are many foreign banks focusing on Bangladesh particularly for LC businesses. LCs issued by banks in Bangladesh are not acceptable to foreign suppliers unless they are added with confirmation by reputed banks abroad. It is said confirmation charges are higher for LCs issued from Bangladesh. What a situation Bangladesh trade is facing! It requires due attention to find out solutions.
As said earlier, export is subject to declaration on a form. The form contains different fields without limiting to FOB value to be filled in with regards to exportable goods. But it has no field in which exporters can disclose relevant charges to be adjusted with export value. If deduction options were available, net export value would easily be determined. Should not the form be added with fields for permissible changes? This is a question; authority should have a look at it.
The opposite side of export is import. As export proceeds are repatriated after deductions of necessary charges, payments for imports should also be subject to deductions of different charges from our end. But situation is different. Rare scope to deduct charges, rather extra payments need to be paid in addition to usual value. These are confirmation charges and financing costs, in particular. Like exports, imports are subject to reports on a regulatory format known as IMP form. There are different fields in the form regarding import transactions. But value is related to the price of the goods, no extra charges are available in the form. Same question can be asked here if there is a need for declaration of such charges like confirmation cost, financing charges, etc. If these fields are available in the form, extra costs for a particular import can be identified easily.
Bangladesh is a trade dependent country. Cross border transactions will continue in all respects. In this case, our position needs to be strengthened so that we can be price maker from price taker. What extra cost we are paying in respect of short realization of export proceeds and extra payments along with import payments needs to be assessed in a proper way. This may show the loss we are incurring for a transaction and in aggregate during a period of time. Just a simple modification can prevent the real view of the situation.
Foreign exchange transactions of the country are guided with the regulations framed by central bank in terms of authorization bestowed on them by the law. They should take the lead to revisit the procedures.