Bangladesh Bank on dollar selling spree to keep taka steady

The foreign exchange regime has made an about-face in the last two months as the Bangladesh Bank continues to inject US dollars (USD) into the market to halt the depreciation of the local currency and meet the growing appetite of the economy.

The central bank had bought a record amount of USD amounting to $7.93 billion from local banks in the last fiscal year as a part of its move to rein in the devaluation of taka.

But, the BB switched gears after August as the demand for the American greenback grew in keeping with the recovering economy: it sold $946 million between August and September as many banks are facing a shortage of USD.

The declining trend of remittances, the rising price of commodities in the global market, and the end of deferral support on payments for imports were the drivers behind the tight situation in the foreign exchange market, according to bankers.

The inter-bank exchange rate stood at Tk 85.50 per USD on October 4. On August 2, it was Tk 84.80, the level at which it had hovered around since July last year.

The taka has been sliding since the first week of August, compelling the central bank to inject dollars into the market.

Md Arfan Ali, managing director of Bank Asia, attributed the sluggishness in remittance flow as one of the main causes for the weakening of the local currency.

A majority of banks held a hefty amount of US dollars throughout last year and in the first half of 2021, riding on the strong inflow of remittance, lower import demand and moderate exports, all influenced by the coronavirus pandemic.

This sent the foreign exchange reserves to $46.21 billion in September, up 18 per cent from a year ago. But, the reserves may decline if the ongoing situation persists, a BB official says.

Already, remittance fell to a 16-month low of $1.72 billion in September as money transfers through informal channels made a comeback.

The receipts were down 19.74 per cent year-on-year, data from the BB showed.

The unofficial route had faced a major disruption since the first quarter of 2020 as international travel came to a halt because of the pandemic, fueling the growth of remittance through official channels.

The prices of various commodities in the international market have risen sharply during the period, widening the import payments and creating pressure on the foreign exchange regime, Ali said.

On top of that, importers have begun making payments, which were earlier suspended by the central bank to support the businesses in the early days of the pandemic.

Settling the deferral payments has created additional pressure for the foreign exchange market, Ali said.

"The pressure will be offset once remittance gets back its momentum," he said, adding that export earnings would also play a crucial role to this end.

In an encouraging development, shipments surged to $4.16 billion in September, the highest-ever single-month export earnings, thanks to a strong rebound of garment exports amid a recovery of the global supply chain from the severe fallout of the pandemic.

Both Ali and Syed Mahbubur Rahman, managing director of Mutual Trust Bank, think the local market will go through a shortage of greenbacks in the next six months.

"The taka will face the depreciating pressure during the period. A strong inflow of remittance and export earnings will help stabilise the market," said Rahman.

The BB official says Bangladesh will face inflationary pressure if the taka keeps falling.

This means importers will have to pay more to buy products from international markets, which ultimately takes a toll on the common people as additional costs are passed on to consumers.

Emranul Huq, managing director of Dhaka Bank, said imports had gone up in the last couple of months as businesses had begun expanding operations.

"Because of the pandemic-induced economic slowdown, businesses had earlier adopted a go-slow policy. Now, they have started importing capital machinery and raw materials. As a result, some banks are facing dollar shortage."

He, however, expressed hopes that the foreign exchange market would calm down within a month or two.