‘Bankers and money launderers play a role in this dollar crisis’

Illustration: TBS

Dollar prices are now hovering at around the Tk100 mark, hampering everything from energy payments to letter of credit payments. When the price of the dollar increases, taka becomes cheaper and import costs naturally get higher, fuelling inflation.

Though exports and remittance benefit from a weaker taka, it doesn't guarantee a rise big enough to offset the increase in import bills. And if things go on like this, it will eventually erode our foreign reserves, which have fallen by $7 billion since August 2021.

The Business Standard sat down with economist and former governor of the Bangladesh Bank Salahuddin Ahmed to discuss the reasons behind this dollar crunch and find possible ways out of it.

What is the reason behind the current dollar crisis that we are experiencing?

There are multiple reasons. Our demand is much higher than the supply. This demand stems from import growth. In the past few months, we have witnessed up to 43% growth. On the other hand, other exports (except our readymade garments) are not doing that well, they are a little static. 

Usually, we receive higher remittances around Eid time, but this year that was not the case. All these factors, combined, created the crisis. Also, as the Covid-19 situation has somewhat normalised [come under control], people are travelling a lot more. People are going abroad for treatment, travel etc.

Another issue that we have failed to tackle is money laundering. 

As the election nears, some people are thinking about stashing some money abroad. As a result, the price of the dollar has increased a lot in the kerb market.

[Additionally] over-invoicing and under-invoicing are practices in the import-export business. This is how prices are manipulated. This also contributes to the dollar crunch.

So we have to control the demand and increase the dollar supply a little; otherwise, we will be in a spot of bother.

The dollar shortage has caused several banks to miss Letters of Credit (LC) payments in the last few days. Bankers are now hesitant about opening new LCs and since every bank has to pay the import LC within a stipulated time (otherwise they will be marked as defaulters), what does that mean for our economy as a whole?

Here bankers play a role. 

Bankers tell parties they like that yes they can open LCs. They tell parties they don't like to buy dollars from elsewhere or the bank will help them buy the dollar from elsewhere. So the role bankers' play in such scenarios is not always positive.

Some banks, indeed, don't have the necessary dollars. All banks don't receive a lot of remittance, all banks don't have the same level of access to dollars. So they are being forced to tell parties we can't [open LCs]. 

Dr Salahuddin Ahmed. Illustration: TBS

But my question is why now after so long? Until now, you have not denied anyone. When the dollar price was Tk82-83, you charged importers Tk85-86. Now the central bank is involved. The central bank is asking the banks not to open unnecessary LCs with a high dollar rate, making the bankers a little cautious now.

Therefore, I believe bankers could have been a little more responsible in this situation, then the situation wouldn't have come to this.

Some experts believe the fact that even after committing to a floating exchange rate in 2003, Bangladesh Bank (BB) kept on heavily fixing the exchange rate, which has contributed to the sudden spike in dollar prices. Otherwise, the devaluation of the taka would have been more gradual. Do you agree with this statement?

This is partially true. 

When you fix the dollar rate, you fix it based on the supply and demand of the market. But when the central bank fixes the price, people who think that they can sell for higher, hold onto their dollars. 

Many people, including those who send in remittances, might send the remittance through unofficial channels thinking that the rate is fixed so it doesn't benefit them. So in that regard, fixing exchange rates has not been logical.

I have recently said that the interest rate and the exchange should not be fixed. If the interest rate and foreign exchange rate are fixed, then what remains of the market dynamics? Those who import, buy things from abroad and sell them in the local market. If it is not based on market dynamics, it is difficult (for them).

The fixation of the interest rate should also be lifted and it should be made floating. But it is now a little late to do so. Still, if we make the exchange rate floating now, supply and demand will balance each other to some extent.

What can be done to ease the dollar shortage in your opinion, especially in the short term?

In the short term we need to tighten the imports. Priority should be given to importing the essentials.

The Bangladesh Bank also needs to ensure that over-invoicing and under-invoicing are not taking place. Nowadays, you can find the price of all products on the internet and in the international media. BB needs to verify the prices of imports using this method. So the central bank has an important role to play here.

Customs also have a role to play. [In regards to] the products that come in, what are they valued at, have the right products come in and have the right number of products come in? The customs need to check these.

[For instance] products weighing 100 tons are supposed to come in but only 50 tons have arrived but the price of 100 tons is being paid. Things like this are happening, half empty containers do come in sometimes. Keeping this in check is the duty of customs. 

Also, there is the exporters' retention quota (ERQ), [exporters can retain a portion of repatriated export incomes in ERQ accounts with which they purchase raw materials and make import payments]. Bangladesh Bank has recently said that exporters can retain only 30% [previously 60%], while they have to surrender the rest immediately.

Bankers also maintain Nostro accounts (an account that a bank holds in a foreign currency in another bank), and they have to bring back money from those accounts. 

The money for the Export Development Fund (EDF) comes from the foreign reserve. The exporters take the money from the bank in the form of loans and earn money after exporting the goods but the money does not return to the foreign currency reserve.