Cenbank halts currency swap to start interbank dollar transactions
It also directed that banks will no longer be permitted to offer incentives from their own funds for purchasing remittance dollars
The central bank has decided to stop currency swaps which involve providing money by depositing banks' surplus dollars to initiate interbank dollar transactions.
Additionally, the central bank has directed that banks will no longer be permitted to offer incentives from their own funds for purchasing remittance dollars.
Association of Bankers, Bangladesh (ABB) Chairman and BRAC Bank MD and CEO Selim RF Hussain told The Business Standard that the central bank issued this instruction during a meeting with the managing directors of commercial banks today.
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Selim RF Hussain said banks will no longer be allowed to offer incentives themselves for purchasing remittance dollars. However, the 2.5% incentive provided by the government will remain in place.
In October 2023, the central bank directed banks through the ABB and the Bangladesh Foreign Exchange Dealers Association (Bafeda) to provide a maximum incentive of 2.5% for remittance dollars from their own funds.
Mentioning that banks can sell their surplus dollars interbank if they want, the ABB Chairman said the dollar rate is now much better than before. The benchmark rate that the central bank has fixed at present is very much aligned with the market.
"Therefore, commercial banks will now sell dollars interbank instead of taking currency swaps from the central bank. It will activate the interbank dollar market," he said.
Bankers said interbank dollar transactions had come to a standstill since the central bank introduced dollar rate-fixing through the ABB and Bafeda in September 2022. Now that the dollar rate is closer to the market rate, trading may resume again.
Abul Kashem Md Shirin, MD & CEO of Dutch-Bangla Bank, said, "Due to the increase in the dollar rate, there is an opportunity to start interbank dollar transactions. When interbank dollar transactions are initiated, banks no longer have to rely on exchange houses for dollars; they can purchase dollars from other banks."
According to central bank data, at the end of the first week of May, banks have outstanding dollar deposits with the central bank through currency swaps of $1.1 billion. The commercial banks have borrowed money at the rate of Tk110 by depositing these dollars.
A senior official of the central bank said that the commercial banks have deposited these dollars with the central bank for different periods. Commercial banks will retrieve these dollars when the period expires.
A managing director of a bank present at the meeting said commercial banks have borrowed Tk12,100 crore by depositing dollars with the central bank. The central bank aims to withdraw this money from the market by closing the currency swaps. Consequently, the money supply in the market will decrease further.
He also said that although a Tk117 mid rate has been established in the exchange rate circular, there is no clear instruction regarding the maximum and minimum rates at which dollars will be bought and sold by the banks.
However, in the meeting, the central bank instructed banks to trade dollars within a range of Tk±1 around the mid rate. Accordingly, banks will now trade dollars at a rate of Tk116-Tk118.
