Remitters offered extra Tk2.75 per dollar. Will it work this time?

Infographic: TBS

Banks have been allowed to take remittances by offering additional Tk2.75 to Tk112.75 per dollar in a desperate effort to boost the inflow of the greenback, which went down to a 41-month low in September.

Considering the 2.5% incentive offered by the government, remitters will now receive Tk115.50 per dollar if they send the money through the banking channel.

The Association of Bankers Bangladesh (ABB) and the Bangladesh Foreign Exchange Dealers Association (Bafeda) reached the decision during an emergency meeting on Friday, a weekly holiday in the country, confirmed by Mashrur Arefin, managing director and CEO of City Bank. 

An order in this regard is expected to be issued today.

At the meeting, the leaders of two organisations conveyed that, moving forward, each bank can provide an incentive of up to 2.5% above the predetermined exchange rate of Tk110 per dollar for remittances. 

The meeting also decided that banks will be responsible for covering the costs of these incentives from their own funds, or they can opt to source funds from the Corporate Social Responsibility (CSR) fund .

However, all types of outflows of foreign currencies – import bills settlement, outward remittances, credit card payment and student files settlements – remain unchanged at Tk110.50 per dollar, meaning that the gap between buying and selling of a dollar will be Tk2.25 as banks are not allowed to charge extra or adjust with the buying prices.

So far, banks have been restricted to offering a maximum of Tk110 per dollar for remittances, with the ability to sell these dollars to importers at Tk110.50. 

As the inflow of inward remittances dwindled to $1.34 billion in September, marking the lowest level since April 2020, the central bank initiated verbal instructions to banks to "acquire dollars at higher rates" two weeks ago.

This directive was also communicated during a meeting of the central bank with the managing directors of several banks in the past week. 

Nevertheless, some other banks have expressed dissatisfaction due to the permission to offer higher rates, declining to adhere to this unofficial directive. 

Their concerns stem from the potential penalties imposed on commercial banks, which have occurred at least twice since May last year. Recently, the Bangladesh Bank imposed fines on the heads of ten commercial banks for allegedly charging higher rates for remittances.

Consequently, some banks have chosen to abstain from offering higher rates for remittances in dollars, despite the verbal order from a deputy governor of the central bank, as noted by several treasury officials.

The question remains: Will remittances see an upswing this time?

Bankers have already articulated diverse responses, with some banks applauding the decision, while others have characterised it as a "planless and ill-conceived decision."

Bankers have reported that many banks are already offering remittance dollar rates in the range of Tk115-Tk116, even before receiving BB's verbal instructions, in response to their demand for a steady supply of greenbacks. 

While the ABB and the Bafeda have formally authorised an additional dollar rate for remittances, it still falls short of the prevailing rates offered by banks.

"These rates are also low in comparison to the hundi rate, which stands at around Tk120 per dollar," said a treasury official of a private bank.

However, the primary concern among bankers pertains to the selling rates of the dollar, as the ABB and the Bafeda have yet to provide clarity regarding the rates at which the dollar can be sold to importers.

A bank's managing director informed The Business Standard that, following the new directive, banks will acquire dollars at a higher cost and then sell them at a lower rate. This raises questions about the feasibility of such a practice.

"Why should we absorb the exchange rate losses? Business is not conducted with the intention of incurring losses; it appears as though this is being imposed upon us," he said, requesting not to be named.

He also said that CSR is kept from the profits of banks. The money from this fund is spent on schools, colleges, hospitals and climate sectors. ABB and Bafeda are asking to take exchange rate loss money from this fund. Imports are settled with our purchased dollars. 

"Are these dollars being spent on public welfare?" he asked, adding that the  decision will reduce the scope of the bank's philanthropic work.

Reducing the demand for hundi

A record number of workers from Bangladesh went to work abroad in the last financial year. But remittances are not increasing that way. Last September saw the lowest remittances in the previous 41 months. 

Bankers and economists say remittances are not increasing as much as the number of workers who have gone out of the country. On the contrary, it is decreasing, clearly showing that money laundering through hundi has increased.

Even if ABB and Bafeda raise the dollar rate under the indirect guidance of the central bank, they feel that it will not be able to reduce the demand for hundi much.

The MD of a leading private bank said if the dollar rate is based on the market, the demand for hundi will decrease somewhat because when the dollar price increases, the dollar price of the hundi also increases, resulting in a decrease in demand. 

Again, if the dollar rate is low, the hundi rate is also low, so the hundi increases. In other words, keeping the dollar rate low means appreciating the hundi, he added.

Another bank MD said two steps should be taken to reduce hundi. "First of all, legal action should be taken against those who are smuggling money through hundi. Second, the dollar rate must be market-oriented. There is no other way." 

Ahsan H Mansur, former economist of the International Monetary Fund (IMF) said that hundi cannot be reduced in any way by maintaining the dollar price.

"We need to increase dollar inflow anyway. Holding down the value of the dollar will not be good," he said, adding that the central bank should give banks freedom to set dollar prices and then the hundi will decrease and the inflow of dollars will increase.