On July 3, the steepest devaluation in Bangladesh's history happened, with the taka being devalued by Tk2.85 to set the rate at Tk108.85 for one dollar from the foreign exchange reserves. Then on July 31, it was fixed at 109.5.
While the set rate is Tk109.5 against the dollar, the price is much higher with some banks selling it for Tk114-116. A confluence of many factors has contributed to this depreciation and why banks are unable to sell dollars at the set rate.
Previously, a portion of the remittances and export earnings used to be added to Bangladesh Bank’s reserves but that amount has significantly lowered due to banks having to pay outstanding settlements amongst other things. As a result, they are unable to offer dollars for sale to the Bangladesh Bank.
Instead, in order to stabilize the currency market, the Bangladesh Bank is consistently selling dollars to the banks.
However, due to the guidelines set forth by the International Monetary Fund (IMF) regarding reserve levels, the amount of dollar sales conducted by the central bank has been slightly reduced at the moment.
Even in the month of July, the central bank acquired some dollars from the market to maintain its reserve.
Consequently, due to the scarcity of the required dollars in the banks, individuals such as importers and foreign travelers are compelled to turn to the curb market to acquire dollars. In this market, the exchange rate remains notably higher at Tk114-116 compared to the official rate of Tk109.50 set by the Bangladesh Foreign Exchange Dealers' Association (BAFEDA).
As a result, dollars are not added to the reserves. Due to this situation for a long time, the pressure on reserves is gradually increasing and the price of the dollar is rising.
However, Bangladesh Bank and Bafeda are working on IMFs single rate guideline.
Selim RF Hussain, chairman of the Association of Bankers Bangladesh (ABB) and Managing Director and CEO of Brac Bank said: “We are working towards the unification of export and remittance rates. Through the last decision, the dollar rate difference in remittance and export bill encashment has been brought to Tk0.50. By this, the exporters will be more encouraged.”
Despite the official announcement by top bank executives, the price of the dollar will not be unified across all cases starting next July. It is expected that the difference in dollar prices will continue until September.
Bafeda is gradually depreciating the value of the Taka as per the instructions of Bangladesh Bank without reducing it too quickly which can have an adverse effect on the dollar market.
Bangladesh Bank spokesperson and executive director told Dhaka Tribune that: "We are moving towards the single rate target.
“By single rate we mean that, there will not be more than a 2% margin in any exchange rate,” he explained.
According to Bafeda’s average of USD/BDT buying cost on August 20, was Tk108.7245 (calculated on a 5-day rolling average basis).
If the price of dollars rises too fast, importers, traveller will suffer and the biggest shock will be faced when paying back foreign debt.
As the amount of foreign debt or loans availed by the private sector rises, people who already had foreign debt are now finding themselves in a difficult position due to currency depreciation.
Even as a country, Bangladesh's foreign debt will suddenly rise in proportion to Taka.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said: “It will be difficult to handle the pressure of foreign debt as the dollar market is on the rise, and if we fail to handle this pressure, the situation in Bangladesh can be awful.”
“The private sector is at risk the most as the foreign debt burden has increased due to the depreciation of the taka. Because those who have taken a loan at the rate of Tk84-85 per dollar, now they have to pay the interest-principal of that loan by buying dollars at Tk110-115,” said the former IMF economist.
Dollar expenses
According to bankers and economists, even earlier, the import expenditure could not be met with the export income only.
As a result, there was a deficit in foreign trade. Now the deficit has increased more. Currently, the average monthly income from remittances and exports in the country is $6.56 billion on average every month.
In contrast, an average of $5.5 billion is spent on imports per month. There is an additional $1.06 billion. Of this, $1.57 billion is needed to pay foreign debt and interest.
As a result, there is an average deficit of $51 million dollars per month.
Apart from this, more dollars are needed to be paid for foreign travel, medical expenses, student education expenses, profits earned by foreign companies and royalties.
According to the report of the central bank, Bangladesh Bank sold $13.58 billion from the reserve in the last financial year to pay the import expenses and foreign debt.
In the first month of ongoing FY24, July, it sold $1.14 billion. BB’s dollar selling continues in August.
