It was big news in the media. Undoubtedly, one of the reasons why it received so much attention was the changed political environment. Most of the analysis attributes the reason to the activities of the new government. Nobody analyzes whether the reason was political or economic.

According to most of the newspapers and other media, the importers were frightened because of the on-going drive against corruption. So they did not dare to open new LC to avoid any kind of possible hassles.

But the fact is that the number of LC opened has increased and come back to its usual trend by mid-February even in the midst of the same drive, which is blamed to drive away the importers from opening the LC.

Therefore, it cannot be explained entirely by the political factors, there must be some economic reasons too, but they did not surface sufficiently in the media coverage. This is one example where we fail to draw the borderline between economic and political phenomenon.

It is enormously important to know the reason of such a downturn in the number of LC. For example, if the reason is entirely political, as it has been portrayed in the media, then the economic policy makers like the Bangladesh Bank has nothing to do about it.

But if the reason is also economic (partly or entirely), then Bangladesh Bank can not only do something about it, but also prevent such a downturn in the future. If we pass the blame to politics even for something which is an economic development, the same thing will happen recurrently.

As mentioned earlier, a decrease in the number of LC opened can be purely translated as an intention of the importers to import less. What it means is that the entrepreneurs, who supply the imported goods in the domestic market, decided to reduce the amount of supply.

If importers anticipate any decrease in the demand for their imported goods, then it will be an appropriate response of instinct economics to curtail the total supply. So the fall in the number of LC opened will be an economic response of the importers if there is any reason for them to anticipate a sluggish demand for their imported goods.

Was there any reason to anticipate a sluggish demand for imported goods in January 2007 or after? It is a basic economic knowledge that demand for something depends on the price; increase in price means decrease in quantity demanded. Price for import depends on two things; the price of the good at the source country (in foreign currency), and the exchange rate.

To make it simple, suppose the price of a computer in the US is $1,000. If $1 is equal to Tk 65, the price of this computer when imported in Bangladesh has to be at least Tk 65,000. But if the price of this computer remains unchanged in the US market but the exchange rate increases, so that $1 becomes equal to Tk 70 and the price of the same computer when imported in Bangladesh has to be at least Tk 70,000.

It does not require much effort to realize that if the value of the dollar in terms of taka increases, the demand for this computer will decrease. Following any increase in the value of the dollar, the importer of this computer will be likely to reduce the volume of imports, i.e., there will be a reduction in the number of LC opened.

In late November and early December 2006, the exchange rate was highly volatile. Value of the dollar had even crossed Tk 74. Certainly, this increase in the value of the dollar was enough reason for the importer to anticipate a sluggish demand for their imported goods in January 2007 or after.

During the same time period, the previous caretaker government was in power. The financial advisor at that time mentioned it clearly that the reason for such abnormal increase in the value of the dollar was an increase in the demand for dollars by the people who went for Hajj. Therefore, it is a temporary phenomenon.

But no other independent scholars or the Bangladesh Bank emphasized this reason. Because of such increase in the value of the dollar, the importers must be inclined to import less in January 2007.

This can be potentially one reason why the number of LC has decreased in January. But so far, this reason has been overlooked. This is important to recognize the economic reason for the observed decreased in LC. If it is not even recognized, how can the respective policymakers or institution act to prevent it in the future?

Md. Abul Basher, Research Fellow, Bangladesh Institute of Development Studies (BIDS), is currently teaching at Willamette University, US.