Desperate to build net reserves, BB asks banks to sell swapped dollars

The Bangladesh Bank is desperate to rebuild reserve by forcing banks to sell their dollars the central bank received under currency swap arrangement as it is nearly $4 billion short of the $19.26 billion net reserve target set by the International Monetary Fund (IMF) for March performance to get the third tranche of the $4.7 billion loan package.

The total net reserve stood at nearly $15.3 billion on 28 March excluding $4.5 billion liabilities from the gross reserve of $19.8 billion, according to Bangladesh Bank data. 

The IMF disclosed that net reserve stood at $15.9 billion in October when gross reserve was $20.3 billion.

The central bank is now desperate to reduce the gap through forcefully buying dollars from banks, according to insiders in the banking sector.

Most of the banks that borrowed money in exchange of dollars under the currency swap mechanism received verbal instruction last week from the central bank to sell their dollars for a short time helping to rebuild reserves, confirmed treasury heads of multiple banks. 

Wishing not to be named, a treasury head of a private commercial bank said dollars under currency swap are considered as short-term liability which impacts the gross reserve but not net reserve.

Net reserve is calculated excluding short term liabilities and the Bangladesh Bank is now suggesting banks to sell their dollars that were kept with the central bank under swap mechanism for short term to reduce the gap with the IMF target.

The total currency swap amount reached $1.7 billion last week, central bank data shows. 

On Sunday, treasury heads from eight banks told TBS that the central bank had instructed most banks to sell the dollars to the Bangladesh Bank, which they initially obtained through swap agreements.

A treasury head from a private bank said their bank has around $50 million with the central bank under swap arrangement. "Now, we are being told to sell the dollars for a period of two months." 

Despite having a negative net open position, a senior official from the central bank has urged them to sell the dollars, said the official.

The deputy managing director of a Sharia-based bank told TBS that before the swap process was introduced, the governor had mentioned that banks could acquire their dollars when needed. "Now, we've received a call from the central bank to sell our dollars under swap." 

The banker explained that their foreign currency nostro account contains dollars reserved for import payments from customers, which are typically due after one or two months. They had given those dollars to the central bank under swap for a short period. 

"Now, if the central bank insists we sell that dollar to them, we won't be able to fulfil our customers' import payments," he added.

He also noted that because they were hesitant to sell dollars, a senior official from the central bank warned them that they might not receive future assistance with dollars.

Regarding this issue, Bangladesh Bank spokesperson Mezbaul Haque told TBS that the central bank has collected $1.79 billion from approximately 20 banks through the swap system. After the swap agreements expired, the amount currently stands at $1.1 billion. 

He declined to comment on the forced purchase of dollars from banks, stating that many banks obtained dollars after their swaps expired and can sell them to the central bank, which is solely up to the banks.

Dollar holdings

The Bangladesh Bank verbally instructed top executives of banks last week to buy dollars at higher price from exchange houses to increase the inflow of remittance, multiple bankers confirmed The Business Standard. 

The remittance rate surged to Tk115 per dollar last week, which was Tk112 per dollar in the previous week, according to market insiders. The higher dollar price is expected to increase monthly remittance inflow above $2.5 billion. 

Though dollar liquidity improved in the last two months thanks to high remittance inflow and drastic fall in import, the Bangladesh Bank could not rebuild reserves due to continuous selling of dollars for government import settlement, said a senior executive of the central bank. 

He said that though dollar holdings have improved in banks, they are not willing to sell dollars for government import due to the high gap between official rate and unofficial rate.

The country's official exchange rate, which is considered as reference rate, remained stable at Tk110 for the last three months when banks sold dollars to importers at above Tk115.

As a result, in case of government LC (letter of credit) payment, banks go to the central bank to buy dollars at Tk110, causing erosion of reserves, said a central bank executive.

The Bangladesh Bank in its monetary policy for the second half of FY24 announced to introduce a crawling peg mechanism by March to reduce the gap between official and unofficial dollar rate. 

However, it backtracked on the decision considering the month of Ramadan as the new mechanism is expected to increase the dollar rate further by Tk1 or Tk2 which will fuel inflation, said another senior executive of the central bank. 

Moreover, the Bangladesh Bank has not devalued taka since December as a huge import cut stopped dollar price fluctuation. 

Financial account 

Imports dropped by $21 billion in 2023 due to various restrictions imposed by the central bank to tackle dollar shortage which eventually turned current account balance into surplus from deficit. 

The country's total import declined by 24.32% to $65.39 billion by the end of 2023 from $86.40 billion in the previous year, according to Bangladesh Bank data. 

It shows the current account balance turned into a surplus of $3 billion in July-January of FY24, overcoming a deficit of over $4 billion in the same period of FY23.

However, the deficit in the financial account keeps widening, reaching $7.3 billion from $812 million during the same period, accelerating reserve erosion. 

Though the Bangladesh Bank is far behind from the IMF ceiling in March this year, it received the second tranche of IMF loans despite missing by above $4 billion net reserve target in June last year.

The IMF also revised down the target for September last year from $25.3 billion to $17.9 billion, setting a new target for March this year at $19.26 billion.

The IMF mission is expected to visit Bangladesh to review the target by the last week of April to first week of May, said a central bank official seeking anonymity. 

Remittance dollar up Tk3 in a week

Officials from the international trade divisions of some banks reported that on Sunday, the exchange rate was Tk114.75 in the US market, Tk115 in Qatar, Tk115.50 in the UAE, and Tk114.75 in the European Union. 

However, from 21 March to 28 March, the exchange rate ranged between Tk112 and Tk113 per dollar in these markets.

Earlier, on 18 March, the remittance rate suddenly decreased by Tk5-Tk6. Some banks purchased remittances from foreign exchange houses at Tk 114-Tk114.50, which gradually decreased to Tk112.

At the end of February this year, exchange houses were offering remittance rates at Tk120-Tk122 per dollar, maintaining such rates for almost a year.

Despite the declining trend in remittance rate, as recently as 21 March, a deputy governor of the central bank ordered banks to purchase dollars at slightly higher than nominal prices. 

Some treasury heads noted that while the dollar rate is falling, such instructions from the central bank tend to push the dollar rate up again.

Expatriates have sent substantial remittances on the occasion of Eid. However, if the remittance amount decreases after Eid, banks may be compelled to increase rates again.