Since June 2017, the market in Bangladesh has been facing challenges with foreign currency payments as the price of the US dollar is going up.
In order to bring some respite, Bangladesh Bank has been selling dollars in limited quantity to commercial banks.
From July 2017 to date, the central bank has released more than $1.5 billion in the market. However, nothing seems able to stabilize the volatile dollar market and so the appreciation of the dollar against taka continues unabated.
According to market data, on March 15 of last year, the import settlement rate, or BC selling rate, of dollar was Tk80.65; on March 15 this year, the rate was Tk83.50, indicating a rise in exchange rate by 3.54% within a period of just one year.
The inter-bank rate for the dollar against taka on the same day last year was 79.55 and 82.96 this year. Commercial banks are selling dollars at a higher rate.
Despite instructions from Bangladesh Bank, that exchange rate of dollar should not exceed Tk83, a number of banks are selling dollars above that level too.
Concerned about the unstable dollar market, Bangladesh Foreign Exchange Dealers’ Association (BAFEDA) recently held a meeting to discuss the volatility in the dollar market, where it was decided that BAFEDA would meet the central bank governor to explain the market condition and the challenges faced by banks.
Analysts are of the opinion that banks are suffering from dollar shortage as the value of import letters of credit (LC) exceeds the amount of dollar available in the market.
However, according to the Bangladesh Bank spokesperson, the central bank is selling dollars keeping in mind the market situation and demand. He said that the Bank has taken steps to ensure an optimum exchange rate and a stable currency market.
Import LCs worth $11.17bn were issued between July and December 2016. In contrast, over the same period in 2017, import LCs issued were valued at $13.14bn and LC settlement was higher by more than 9%.
Export earnings and remittances have not kept pace with imports and this has resulted in a shortage of dollars. The LCs issued in this financial year will be settled within a few months which will cause the shortage to intensify.
Banking seniors feel the situation will remain stable if Bangladesh Bank continues to sell dollars according to demand. Otherwise, the crisis will take a turn for the worse and increase our trade deficit, which may adversely affect the economy.
State-owned banks including Sonali, Rupali and Janata purchased most of the dollars sold by Bangladesh Bank, and used it to import food and capital equipment for large government projects that are supposed to help deal with the crisis. All four state-owned banks saw a rise in number of import LCs.
In order to ensure stability in the currency market, Bangladesh Bank sold $1.498bn from July 2017 to February 26 of this year and no dollar was purchased during this time. This is in stark contrast to the previous financial year when, against the sale of $175mn, the central bank bought $1.931bn from different banks.
Considering the adverse effects of volatility in the currency market, it is imperative that the government take measures to combat sluggish export growth and increase remittance inflow to ensure steady supply of dollar -- although it is easier said than done.
In our treasury days, when we were asked what the price of the dollar should be, our typical answer used to be: The rate that the market is ready to pay.
Conventional wisdom says that a cheap local currency should help to increase exports and inward remittance, but that basic explanation no longer suffices because the situation is much more complex. Boosting exports and remittance will require extensive market reforms and other incentives.
The question then arises: Which direction and how far will the dollar price go?
There are rumours that the banks are holding on to dollars without breaking the net open position dictated by the central bank through dollar-taka SWAPs. The regular SWAPs in the inter-bank market has exceeded $150mn, from an apprehension of further increase in the dollar price.
Banks were rather expected to sell dollars since the local currency liquidity is shrinking in the market; hence the interest rate is going up.
I guess the central bank is doing what it’s supposed to do: Trying to strike a balance between foreign exchange receipts and payments.
As an emerging economy, our import and service payments would keep on increasing faster than foreign currency receipts, unless we actively try to balance it out.
We have to carefully consider other policy reforms and incentives too.
It isn’t reasonable to limit imports indiscriminately because the expansion and growth of our economy compels us to import capital goods and certain raw materials, but perhaps some form of import duties could be levied on luxury and consumer goods.
At the same time, we need to increase our foreign currency receipts through exports and inward remittance.
But for the long run, we should be doing everything we can to develop our domestic industries so that eventually we won’t have to rely on import as much, and our balance of payments will become much more manageable.
Mamun Rashid is a leading banker and economic analyst.