Remittance dollar rate jumps Tk2 in two weeks amid rising demand

Infographic: TBS

The remittance dollar rate, a key indicator of the real-time dollar price, has risen by nearly Tk2 in just two weeks, driven by mounting payment pressure on banks, especially state-owned banks, which are purchasing more dollars than ever to settle overdue LC payments.

A senior official of a state-owned bank told TBS that while overdue payments have decreased significantly in the last two months, some remain pending, including payments for fuel oil imports and electricity from Adani. 

With the central bank halting dollar sales from reserves, state-owned banks are relying on remittances and the interbank market to meet demand, he added.

At least six state-owned and private banks reported that the maximum rate for purchasing dollars for remittances reached Tk124.20 last Tuesday (10 December). This marks an increase from the Tk122.20-122.50 range in late November and Tk121.50-121.80 in early November.

When asked about the rising rate, policy-making officials from several commercial banks explained that previously, state-owned banks primarily opened LCs for fuel oil imports, reducing the burden on private banks. However, the situation has shifted, with 7-8 private banks now handling these LCs. 

Previously, the central bank sold dollars from reserves for import payments. Under new Governor Ahsan H Mansur, it has stopped selling and started buying dollars to rebuild reserves, forcing banks to rely on the market for LC payments, increasing dollar demand and rates, they said.

"State-owned banks have ramped up dollar purchases from the remittance market to clear overdue payments, driving up the rate," said the deputy managing director of a leading bank. 

"To secure remittance dollars, state-owned banks are offering higher rates, compelling us to do the same. Dollars are still somewhat scarce," he told TBS, on condition of anonymity.

Bankers said that while formal channel rates have risen, the gap with informal rates remains unchanged. With a 2.5% incentive, remitters now receive up to Tk127.30 per dollar, compared to Tk128-129 through the illegal hundi channel. In 2022-2023, this gap reached as high as Tk7-8.

A bank managing director, requesting anonymity, said, "The remittance market has always been rate-sensitive. Banks offering higher rates attract more remittance dollars, and those seeing higher remittance growth are indeed paying higher rates."

Banks are currently offering up to Tk120 for export dollar collection and charging Tk122-124 for LC settlements. 

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank Ltd, said that the increased demand for dollars stems from opening import LCs for fertilisers, fuel oil, and food products ahead of Ramadan. While the pressure of overdue payments from state-owned banks has eased, it hasn't fully subsided, prompting these banks to focus on remittance dollars.

State-owned banks dominate remittance growth

During the July-November period of the current fiscal year, remittance inflow through formal channels rose by 26.44% year-on-year, increasing from $8.81 billion last year to $11.14 billion.

Central bank data reveals that state-owned banks are capturing most of this additional inflow. Since the interim government took office, these banks have surpassed private banks in collecting remittance dollars.

Five state-owned banks — Agrani, Janata, Rupali, Sonali, and Krishi – received $3.42 billion in remittances during this period, a 217% increase from $1.08 billion in the same period last year. Rupali Bank recorded the highest growth.

Bank dollar holdings in foreign acc drop by $1.46b

Dollars held by commercial banks in foreign accounts fell by $1.46 billion from August to October, according to central bank data. Nostro account balances declined from $6.09 billion in early August to $4.62 billion by the end of October, a 24% decrease.

A managing director of a first-generation private bank attributed the decline to changing interest rate dynamics. With the central bank raising policy rates, taka yields have risen significantly, while the US Federal Reserve has slightly reduced dollar rates. This shift makes investing in taka more profitable. Hence, banks might boost their taka balances over holding dollars.

Explaining that banks can reduce dollar balances to maintain taka liquidity, he said, "Currently, investing in treasury bills and bonds offers attractive returns, prompting banks to allocate part of their liquidity there. Consequently, dollar balances are reduced to sustain overall liquidity."

"Additionally, many banks have scheduled import payments, and as their maturity dates approach, these payments lead to further declines in dollar balances. Moreover, rising demand in the dollar market is also a contributing factor," he added.

According to the central bank, the country's foreign exchange reserves stood at $18.85 billion on 4 December, based on the BPM6 standard. This marks a decline from $19.87 billion on 30 October.

BPM6 is the international standard for calculating foreign exchange reserves, as mandated by the International Monetary Fund, which requires countries to compute and disclose reserves using this method.