Why unified exchange rate couldn't stop dollar sale from reserve

The Bangladesh Bank keeps selling dollars from its foreign exchange reserves despite a historic high devaluation of the taka in a single day on 3 July, indicating that the implementation of a unified exchange rate is still dictated. The gap between the officially declared rate and the market rate has now exceeded Tk5 per US dollar.

Although the central bank set the rate for selling dollars from its reserve at Tk109.50 in line with the interbank rate, market insiders reveal that most banks are opening import letters of credit (LCs) at Tk114-116, disregarding the official rate.

Due to the higher dollar rate in the market, the Bangladesh Bank had to offload $1.14 billion from its reserves in July to cover import expenses. This trend has been consistently observed for over a year, indicating a sustained challenge in managing the country's import costs. This figure, equivalent to Tk12,500 crore, was the highest amount in taka for a single month, attributed to the high dollar rate of Tk108 to Tk109, as per central bank data.

The objective of introducing a unified exchange rate was aimed at easing pressure on foreign exchange reserves, but it has not yielded the desired results.

Gross reserves now $23.5 billion officially

Bangladesh's foreign exchange reserves have continued to deplete since the implementation of the unified exchange rate, following the IMF's Balance of Payments and International Investment Position Manual (BPM6) since 13 July.

As per the central bank's data, the gross reserves under BPM6 declined to $23.3 billion on 2 August from $23.56 billion on 13 July. This amount can cover imports for nearly four months as per the recent import trend. The international standard on reserves requires three months' import bill coverage.

The currency devaluation on 3 July was the steepest in Bangladesh's history, with the taka devalued by Tk2.85 to set the rate at Tk108.85 for one dollar from the foreign exchange reserves. 

The central bank's move was aimed at implementing a unified and market-driven exchange rate regime, ending multiple exchange rate mechanisms, and fulfilling one of the IMF's conditions to qualify for a $4.7 billion loan package approved in January 2023.

Subsequently, the central bank devalued the taka twice more, increasing the dollar rate to Tk109.5 by 1 August, aligning with the interbank rate. However, inter-bank market transactions remained ineffective as the declared rate continued to be dictated.

The Bangladesh Foreign Exchange Dealers Association (Bafeda) and the Association of Bankers, Bangladesh (ABB) have fixed the interbank dollar rate at Tk109.5, and the dollar rate for exports has been set at Tk108.50, for remittances at Tk109, and for imports Tk109.5, but all these are only on paper.

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Many banks have been observed buying remittances at above Tk113 and selling to importers at above Tk114, as reported by bankers speaking anonymously to The Business Standard.

A senior banker leading the treasury department of one of the largest private commercial banks told TBS that while there is officially a unified exchange rate with the highest Tk0.5 gap between import and remittance rates, in reality, these rates are only on paper.

Most banks are declaring these rates officially but maintaining another book for buying and selling dollars at higher rates than the declared ones, the banker said, adding that the Bangladesh Bank is also aware of this.

Md Enayet Ullah, president of the Wholesale Spice Traders Association, told TBS he opens import LCs in Islami Bank and Social Islami Bank where he gets a dollar rate of Tk114. He is also the director of Al-Arafah Islami Bank where the dollar rate for import LCs is the same.

He said there is a dollar crisis in the market and they are happy if banks agree to open LCs even at Tk114 as many banks are refusing to open LCs.

Another importer who imports raw materials for mega projects told TBS, wishing not to be named, that he opened an LC at Tk113.50 with NCC Bank last week.

He also revealed that he had talked with multiple private banks where the rate was higher.

Bishwajit Shaha, director (Brand) of City Group, told TBS that they have been experiencing difficulties obtaining dollars, even at Tk116 for LCs. While they opened LCs at Tk115 to Tk116 with certain banks, Bishwajit declined to disclose the lenders' names, citing potential trouble for their business.

He pointed out that not only City Group but other major importers are also facing challenges in opening LCs at favourable rates.

Echoing Bishwajit's sentiments, Shaham Taslim Shahriar, deputy general manager of Meghna Group of Industries, confirmed that they are settling LCs at Tk115 to Tk116 with lenders.

Amid this situation, some foreign banks filed complaints against Janata Bank with the Bangladesh Bank, accusing the state-owned lender of delaying import payments to buyers. TBS has obtained a copy of the complaint letter.

When approached for comments, Md Abdul Jabber, managing director of Janata Bank, contradicted the notion of a dollar crisis.

He said they are not facing a dollar crisis but admitted that there have been delays in some payment cases.

When asked if Janata Bank is following the Bafeda-set import rate as it does not have a crisis of dollars, he said they are buying dollars from the Bangladesh Bank for government imports.

"We are not trying to buy dollars from other banks as different banks have different rates," he added.

Usually, if dollars are available in the interbank market, a bank does not need to buy it from the central bank. 

Bangladesh Bank data revealed that interbank forex transactions averaged $70 million to $80 million in July this year, with the central bank selling the same amount of dollars to banks from its reserves.

In contrast, during the pre-crisis period, when a single exchange rate was prevalent, interbank transactions exceeded $300 million.

Selim RF Hussain, president of the ABB, emphasised that banks should adhere to the import rate set by Bafeda.

He suggested that banks unable to sell dollars to importers at the designated rate should refrain from opening LCs.

While acknowledging the dollar shortage, Selim stressed that banks must manage LCs within their capacity, following the Bafeda set rate.

He also mentioned that he does not have any information about any bank not following the set rate. If any importer is forced to open LCs at a dollar rate higher than the Bafeda rate, they should file a complaint with the Bangladesh Bank against the lender, he said.

In September last year, the Bangladesh Bank instructed Bafeda to set different rates for exports, imports, and remittances to control the rapid increase in dollar prices.

The multiple exchange rates were introduced as the dollar rate jumped to Tk115, causing chaos in the forex market. However, the exchange rate came down to below Tk110 for some time but it has since picked up again above Tk115 now due to dictated exchange rate.

The Bangladesh Bank could not stop reserve depletion even after restricting imports as the unified exchange rate was dictated. 

The LC opening for import declined by $21 billion in July-May of the last fiscal year from the previous year. 

The total import LC opening came down to $62 billion in July-May of last fiscal year from $83.58 billion in the same period of the previous year as banks are unwilling to open LC amid the dollar crisis. 

The huge drop in imports reflects the slowdown in economic activities which will further impact exports in the near future, said industry insiders. 

Though import was restricted to save dollars, it did not work due to the managed dollar rate, they said.