Bankers' decision to appreciate taka draws mixed reactions

Bankers today decided to appreciate the taka against the US dollar by Tk 0.50 from tomorrow as they observed an improvement in the overall current account balance, which records the nation's transactions with the rest of the world.

Banks will buy the greenback at Tk 110 from exporters and remitters and sell at Tk 110.5 each, according to a decision taken in a meeting of the Bangladesh Foreign Exchange Dealers' Association (Bafeda) and the Association of Bankers, Bangladesh (ABB).

Until today, the official purchase rate of the dollar by banks was Tk 110.5 and the selling rate was Tk 111, which most of the banks did not follow as they were struggling to get the greenback at the prescribed rates from exporters and remitters amid a shortage of the dollar and speculation of further depreciation of the taka.

Importers have been complaining about counting higher expenses to open letters of credit (LCs) than the uniform rate of Tk 111, while bankers said they were facing difficulty getting foreign currencies from remitters despite paying up to Tk 116 for each dollar.

The latest decision, which comes three weeks after the ABB-Bafeda decided to depreciate the taka, drew mixed reactions from some heads of treasuries at banks while an economist termed it 'inappropriate', saying that the taka was in no position to appreciate now.

"Let us wait and see how the market reacts," said a treasury chief of a private bank on condition of anonymity.

Bankers said the decision was taken as the country's current account returned to the positive, reaching $892 million in July-September of the current fiscal year of 2023-24 due to a sharp slowdown in imports.

A country's current account represents its imports and exports of goods and services, payments made to foreign investors, and transfers such as foreign aid, according to Investopedia.

Besides, ABB Chairman Selim RF Hussain said overdue payment obligations of banks with correspondent banks abroad had reduced.

"Net open position (NOP) of most of the banks has normalised. The overall situation has improved," he said.

NOP means the net sum of all foreign-currency assets and liabilities of a financial institution, inclusive of all of its spot and forward transactions and off-balance sheet items in that foreign currency.

Hussain said the taka had been losing value against the US dollar for over one year. "We have to bear the pain. We must also send a positive signal to the market," he said.

Bankers hoped that the liquidity situation might improve in the market as banks' overall dollar holdings had improved and overdue international payment obligations had reduced.

The ABB-Bafeda decision may also tame speculation in the market, said a banker.

"The market will act according to its own reality," said a top official at another private bank.

He said they were only getting insignificant amounts of the US dollar at the rate fixed earlier. "We have to pay higher if we want to buy large amounts of foreign exchange," he said.

Another banker said: "This (reduced rate) is not going to work properly."

Ahsan H Mansur, executive director of the Policy Research Institute (PRI) of Bangladesh, said it is true that there has been an improvement in the country's current account balance.

"But given the deficit in financial account, the foreign exchange market is not going to be stable anytime soon," he said.

Bangladesh's financial account fell into a deficit of $3.92 billion during July-September period this fiscal year from a surplus of $839 million in the same period of the previous fiscal year of 2022-23.

The financial account, a key component of overall transactions with other countries, covers claims or liabilities to non-residents concerning financial assets. Its components include foreign direct investment, medium and long-term loans, trade credit, net aid flows, portfolio investments and reserve assets.

Mansur said improvement in the current account balance is not enough to stabilise the foreign exchange market.

"The decision to appreciate is inappropriate. Because no significant transaction will take place at this exchange rate other than official transactions," he said.

He said a second inter-bank foreign exchange rate had already emerged within the interbank market since banks are trading foreign exchange at the depreciated rate amid shortage of the dollar.

"This is the first time we have seen the emergence of an unofficial interbank exchange rate. It is very disappointing," he said, "Banks are making transactions at the unofficial exchange rate but they cannot show that in their documents.

"This situation may give rise to false accounting, creating another problem for the regulators."

Mansur said the market has received no signal for the taka to appreciate given the large overdue forex obligations.

In response to the ABB-Bafeda's view that the foreign exchange situation in the market has improved, he said: "I hope that is true. But we don't have any data in this regard. How will we understand whether the foreign exchange crisis is getting worse or better?"

He suggested the government publish data on sector-wise unpaid payment obligations.

"Only then will the market get a clear understanding of the current situation. At present, we understand that there is huge liability in the form of short-term private debt, payments to electricity companies, airlines and in the form of unsettled LCs."

"Under these circumstances, I don't find any reason for appreciation of the taka as declared by ABB-Bafeda."

Syed Mahbubur Rahman, managing director and CEO at Mutual Trust Bank Ltd, said they will comply with the latest decision.

"Let us see. But everyone has to stick to the directive for a better outcome. Most importantly, the administration needs to take steps against people who are involved in hundi. Otherwise, we will never be able to achieve our goal."