BB move for greater rate flexibility makes forex market volatile
State banks set maximum remittance rate at Tk123, central bank verbally instructs pvt banks to follow it
Highlights
- Bangladesh Bank's move towards a flexible exchange rate, under IMF guidance.
- Strong remittance inflows and export earnings ensured forex reserves climbed to $20 billion.
- Banks face payment pressures due to central bank instructions to clear overdue LCs.
The country's forex market turned volatile again with high fluctuations in the dollar rate as the Bangladesh Bank moves to implement greater flexibility in the exchange rate in line with a staff-level agreement with the International Monetary Fund (IMF).
Despite robust remittance inflows and impressive export earnings, the remittance rate jumped to Tk128 last week, which was between Tk122 and Tk123 in November.
In this situation, four state-owned banks, including Sonali, Agrani, Janata, and Rupali, held a meeting on Monday, agreeing to buy remittances at a maximum of Tk123.
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Some private commercial banks were instructed by the relevant department of the Bangladesh Bank to follow the rate, according to bankers wishing not to be named.
The Bangladesh Bank is likely to revise its official exchange rate upward to Tk123 from the existing Tk120 in line with market demand.
Explaining the reasons behind rate fluctuations, a senior executive of the central bank told The Business Standard that there is an expectation that the rate will go up due to the adoption of more flexibility in the exchange rate.
He said more flexibility means there will be less interference, and the Bangladesh Bank agreed with the IMF during the latest visit by a review mission of the multilateral lender earlier this month.
In a press release on 18 December regarding the third review of Bangladesh's extended credit facility and extended fund facility, the IMF mentioned that the central bank has committed to fully implementing exchange rate reforms to ensure greater flexibility.
During the visit, the IMF mission also held a meeting with treasury heads of commercial banks regarding the exchange rate mechanism.
The dollar rate started to rise slowly from early December after the IMF's meeting with commercial banks, as the Bangladesh Bank agreed to adopt greater flexibility.
The IMF press release states, "To address the emerging external financing gap and persistently high inflation, near-term policy tightening is crucial. Fiscal consolidation should prioritise the swift implementation of additional revenue measures, such as removing tax exemptions, while restraining non-essential spending.
"Coupled with monetary tightening, greater exchange rate flexibility and safeguarding foreign exchange reserve buffers will strengthen the economy's resilience to external shocks."
The IMF's instruction for greater flexibility in the exchange rate came at a time when the country's inflation was on the rise, reaching 11.38% in November, causing immense suffering for the general population.
Tighter monetary policy to rein inflation
The Bangladesh Bank is also committed to further tightening monetary policy to control inflation.
Tightening monetary policy will increase borrowing costs further, which will hurt investment, and the eventual result will be slower growth, said another senior executive of the central bank.
However, the government is now emphasising stabilising the forex market and inflation instead of prioritising growth, he added.
Private sector credit growth has already slowed to single digits amid rising interest rates, which now exceed 13%.
Reserves stable
Meanwhile, gross foreign exchange reserves increased to $20 billion again on Sunday after one and a half months, despite dollar rate fluctuations.
The reserves remained stable between $19 billion and $20 billion under the interim government due to the increase in the dollar price to Tk120, aligning with market demand.
The Bangladesh Bank also stopped selling dollars from reserves after the ouster of Sheikh Hasina's regime on 5 August amid a student-led mass uprising.
Describing the current forex scenario, another senior executive of the Bangladesh Bank said the rate fluctuation is not due to a dollar crisis but rather from expectations of a greater rate flexibility mechanism.
Moreover, some players are raising the dollar rate to take advantage of the more flexible rate mechanism, he added.
Citing the current dollar inflow, he said the primary inflow is higher than spending as the combined total of remittance and export earnings exceeds imports.
In November, dollar inflow was $6.7 billion, including $4.7 billion from exports and $2.2 billion from remittances, while imports were nearly $6 billion.
The remittance inflow has been very impressive in December, as the country received $2 billion in the first 19 working days, and the central bank expects the figure to reach nearly $2.5 billion by the end of the month.
The daily net opening position of dollars in banks remained in surplus by $400 million to $500 million, which was in deficit last year.
In December, the total inflow, including remittances and exports, is expected to reach $7.5 billion, while imports are estimated to be around $6 billion, leaving nearly $1 billion in surplus, said the central bank executive.
Tk128 dollar is 'illogical'
Speaking to TBS, the treasury head of a private commercial bank said the dollar price of Tk128 is completely illogical as the market is liquid.
Sharing his experience, he said exchange houses are taking advantage of the increased flexibility in the exchange rate. He agreed that the rate of Tk123 set by state banks is logical.
He explained that the dollar rate increased to Tk122-Tk123 due to high Letter of Credit (LC) opening demand ahead of Ramadan.
Moreover, the central bank allowed crisis-hit banks to open LCs to support businesses and resume regular operations, which contributed to a slight increase in the dollar rate, he said.
Banks instructed to clear overdues
He also mentioned that there was payment pressure as the Bangladesh Bank strictly instructed banks to clear their overdue.
In a circular on 12 November, the Bangladesh Bank warned treasury heads of punitive action if import payments remained overdue.
The Bangladesh Bank held two meetings in the first week of December with treasury heads of commercial banks, where they were strictly reminded to ensure payment clearance.
In October, import settlement crossed $6 billion, the highest in the last one and a half years. This trend continued in November, although the latest data has not yet been released.
Another private commercial bank treasury head said the lack of transparency in dollar rates is one of the reasons behind the rate hike.
Speaking to TBS, he said there is no public list of dollar rates, so buyers and sellers rely on media reports for rate information.
The banker said banks have been reporting their buying and selling rates to the Bangladesh Bank regularly, but the authority is not making this information public.
The central bank still uses the official rate of Tk120 on its website, even though the average market rate was between Tk122 and Tk123, he said.
The inconsistency between public and unofficial rates is misguiding market demand, he added.
Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, told TBS that banks are under payment pressure at the end of the year. Moreover, the central bank has instructed banks to clear overdue payments.
He said the central bank governor also suggested that banks focus on clearing internal payments instead of rates.
However, there are some aggregating activities, as some are buying dollars at different prices and selling at the average price to make money, he added.
Speaking to TBS, Sheikh Mohammad Maroof, managing director of Dhaka Bank, said there was additional payment pressure against government LCs in the first week of December which contributed to the surge in dollar prices.
He said banks were also under pressure to clear overdue payments following the central bank's instructions.
However, a free exchange rate will curb the tendency to take extra benefits, which will bring discipline, he added.
