Cenbank eyes stabilising forex market in new monetary policy

The Bangladesh Bank is planning to reduce the gap in multiple dollar rates to a maximum of 2% from the existing 7% in the upcoming monetary policy for the next six months of the current fiscal year, scheduled for announcement on 15 January.

At present, there are four kinds of dollar rates in the market: a maximum of Tk107 for importers, Tk102 for exporters, Tk107 for remitters, and Tk100 at which the Bangladesh Bank sells a dollar.

Previously, one rate was maintained for dollar sales, which was used as a reference rate.

Infographic: TBS

But, since the dollar crisis intensified last year, the Bangladesh Bank instructed the Bangladesh Foreign Exchange Dealers' Association (Bafeda) to set different rates to control the unusual hike in dollar prices.

In a recent meeting between the Bangladesh Bank, stakeholders and economists over the upcoming monetary policy, Governor Abdur Rouf Talukder hinted that multiple dollar rates will be continued for the next six months, according to a meeting source.

He, however, assured that the forex market will be stable in the next six months as the central bank will take measures to reduce the gap in different dollar rates.

He also hinted that the central bank's dollar selling rate will be gradually increased to reduce the gap with market rates.

The central bank raised the dollar rate to Tk100 at the beginning of this month, 16.55% higher from Tk85.8 in January last year.

Meanwhile, it is also planning to keep import tightening measures in place this year to increase dollar availability in the market, said a senior executive of the Bangladesh Bank.

He said the Bangladesh Bank is expecting more dollar inflow in the next six months as the government will get loans from various multinational donors, including the International Monetary Fund.

Moreover, exports are on the rise while the country has already received more than $10 billion in the first six months of the current fiscal year.

The Bangladesh Bank projected that export and remittance totals will be nearly $75 billion by the end of the fiscal year when imports will be nearly $80 billion.

The $10 billion gap can be managed by foreign aid and loans, he said.

With this projection, the central bank expects that the balance of payment position will be improved in the next six months, with a narrowing trade deficit.

Exports over $27 billion

Exports in the first six months of the fiscal year were over $27 billion, which is about 11% higher than the same period of the previous fiscal year.

On the other hand, though imports slowed, still the total figure was higher than the previous fiscal year.

Imports totalled $32.54 billion in the July-November period, which was $31.16 billion in the same period last year.

Bangladesh saw an export record of $5.37 billion in December last year.

The country's external trade deficit decreased by 6.41% to $11.79 billion year-on-year in the first five months of the current fiscal year.

The trade deficit in the corresponding period of the previous financial year was $12.60billion.

Inflation on the agenda

Though controlling inflation is the core object of the monetary policy, the central bank fears that it will be tough to rein in if the government hikes electricity prices.

Bangladesh Bank has few tools to control cost-push inflation and the hike of electricity price will fuel the increase in costs, said the senior executive of the central bank.

Inflation was 8.71% in December and the government moved to hike electricity price by 15.43% in the next month.

In the meeting, the governor also cleared that the lending rate cap will not be lifted considering the election year, said meeting source.

However, the central bank will increase money supply through various refinancing schemes in the new monetary policy to ease the ongoing liquidity crisis, said a senior executive of the regulator.

When the banking sector is going through a severe liquidity crisis, the central bank is paying the cost of the lending rate cap by printing new money to support the government for budget expenditure.

The Bangladesh Bank issued Tk50,000 crore in the first six months of the current fiscal year to supply money to the government instead of taking it from the commercial banks due to high rates amid liquidity crisis.

The Bangladesh Bank set private sector credit growth to 13.6% for December last year in the current monetary policy when the growth was 13.92% in November.

Broad money growth was projected to grow at 10% in December against which growth was 8.6% in November as per latest available data.

The slow growth of broad money was due to negative foreign asset growth of 12.70% in November, when the target for December was 10% in the existing monetary policy.

The slow growth in broad money indicates shortage of money supply and the central bank is considering to pour money into the system in the new monetary policy.

How is dollar market now

Dollar rates have been stable for the last one-and-half months due to a fall in LC (Letter of Credit) opening for import.

For instance, the dollar rate in the kerb market fluctuated by Tk5 in a single day reaching a record Tk120 in the last year, but has since cooled down to Tk111.80 to Tk112.

Dollar rate for import LC also stabilised at the highest of Tk107 in the last one and a half months, which fluctuated every day in the last year.  

The LC opening against imports declined by 26.50% or $12 billion in the first six months of the current fiscal year.

Total value of LC opening was $32.39 billion in July-December of the current fiscal year which was $32.39 billion in the same period of the last year, according to the central bank data.

Mohammad Ali, managing director and CEO (Current Charge) of Pubali Bank, told The Business Standard, "Our LC openings are lower than before. Although the export income of many countries is decreasing, ours is increasing, and considering the global situation, it may increase further.

"Besides, we also have good growth in remittances. We believe that over invoicing has also reduced compared to earlier due to increased monitoring by the central bank and commercial banks. Hopefully, in the next few months we will see a good impact on the trade balance and current account balance."

He also commented that there will be a big positive change in the economy of Bangladesh in the next six months.

He said if there is a surplus in the current account balance, then the price of the dollar will decrease. In other words, the value of the money will increase. Then the difference in the dollar rates will also decrease due to reduced demand.

The veteran banker said the agricultural sector will give hope to the economy in the ongoing crisis.

Ali said the central bank is encouraging banks to give relatively low interest loans from the refinance scheme of the agricultural sector. This initiative will increase wheat and maize production.

"We are already seeing agricultural yield increase compared to before."