Dollar demand on the wane, price to fall further: Cenbank

The Bangladesh Bank has indicated a downward trend in the price of the US dollar in the coming days, citing reduced demand for foreign currency within the country due to dwindling imports.

At a press conference at the central bank headquarters in the city on Thursday, central bank Spokesperson Mezbaul Haque lauded the recent decision of the Bangladesh Foreign Exchange Dealers Association (Bafeda) and the Association of Bankers, Bangladesh (ABB) to decrease the price of the dollar by Tk0.50.

The price of the US dollar was reduced by Tk0.5 on Wednesday as the demand for the greenback fell amid dwindling imports. The interest rate against loans in the global market is likely to decrease. If the foreign debt in our financial account decreases, the price of the dollar will decrease further, Mezbaul said.

"We closely monitored the demands for imported products and their supply in the last several months. Our observations reveal a surplus in the current account balance. Although our financial account is currently in deficit, it is anticipated to improve in the upcoming days, with debt payments gradually decreasing," he said.

"As debt repayments reduce, our demand for dollars will ease. Most letters of credit (LCs) are now settled at sight, maintaining control over the demand for dollars in imports," he said.

Mezbaul Haque said the price of foreign exchange is dictated by the interplay of market demand and supply. The recent trend of lowering interest rates globally, as evidenced by the actions of various central banks, is likely to contribute to a decline in the value of foreign exchange. Additionally, the gradual normalisation of the global supply chain is expected to exert further downward pressure on foreign exchange prices.

Private sector foreign loans (short-term) have declined significantly since 2022, from $16 billion to $12 billion as of September 2023. This downward trend is expected to continue, with projections indicating a further reduction to $6.92 billion by September 2024. This positive development is anticipated to alleviate the pressure on foreign loan repayments and bring about substantial benefits, he said.
In response to a question, the central bank spokesperson said, "Most of our banks have more dollars than they need. However, some banks are facing a shortage." 

"Most of the import LCs that businessmen are opening now are Site LCs," he said, expressing hope that the country's inflation and dollar crisis will soon be under control.

On Wednesday, Bafeda and ABB depreciated the dollar by 50 paisa. So, the price for purchasing dollars for export proceeds and remittance fell to Tk110, down from Tk110.50 and the price of selling dollars for import settlements was set at Tk110.50 which was Tk111 earlier.

This marks the first downward adjustment to the dollar price after more than a year of hikes.

The dollar rate was slightly reduced at a time when banks were buying remittances at the rate of Tk121 to Tk122. And in the open market, cash dollars are being sold at Tk123 to Tk124.

The recent decline in dollar prices has puzzled treasury officials at several private banks, who see no clear rationale for this. This downward trajectory is likely to have further repercussions for remittances.

The ongoing dollar crisis has led to a significant depletion of the country's foreign exchange reserves. In an attempt to encourage the repatriation of hoarded dollars, the central bank has implemented a strategy of lowering the dollar's value, hoping to capitalise on concerns about its potential depreciation, they said, expressing concern that this move might worsen the crisis.

Banks' dollar holdings rising despite falling reserves

Amidst a decline in the country's foreign exchange reserves, banks' dollar holdings have paradoxically experienced an increase. This unusual trend has persisted for the past two years, coinciding with the ongoing dollar crisis.

According to the Bangladesh Bank, the Net Open Position (NOP) of banks' foreign currency holdings stood at a positive $192 million as of 20 November 2023. This indicates that 39 banks hold more dollars than they owe.

In contrast to the current positive NOP position, banks' foreign currency holdings were negative by $425 million on 20 November 2022. During that period, 31 banks held more dollars than they owed.

The foreign exchange net open position (NOP) of a bank is the difference between a bank's foreign currency assets and liabilities at a given point in time. When the assets are in excess, the NOP is long, and when liabilities are in excess, the NOP is short.

Bangladesh's foreign currency reserves have declined significantly over the past year, from $34.09 billion in 2022 to $19.52 billion as of November 22, 2023. This represents a decrease of $14.57 billion. 

A senior treasury official from a state-owned bank told TBS that the alarming decline in foreign exchange reserves has left numerous importers struggling to secure the necessary dollars for their businesses. While the Net Open Position (NOP) holdings remain relatively high, this alone cannot negate the existence of a dollar crisis.