BB buys dollars to prop up exchange rate

The central bank bought a record $5.14 billion from the market in the outgoing fiscal year to create artificial demand for the greenback in an effort to stabilise the exchange rate.
The amount was only $157 million in fiscal 2011-12 and $316.50 million in the previous year.
On the other hand, Bangladesh Bank sold no dollars in the market in the outgoing fiscal year. The BB sold dollars only once in fiscal 2006-07 since the country has adopted the floating exchange rate regime in May 2003.
The BB's effort helped raised the country's foreign exchange reserve to more than $15 billion and cushioned the remitters and exporters against deeper shocks. Conversely, it pushed inflation up and made the exchange rate policy inconsistent, analysts said.
“The BB should not intervene in such an aggressive way, which is inconsistent with its floating exchange rate policy,” said Monzur Hossain, a research fellow at Bangladesh Institute of Development Studies.
A huge amount of fresh local money -- Tk 40,714 crore -- that was injected into the market has increased the inflationary pressure, Hossain said.
Demand for the dollar has gone down in recent months due to a slump in imports.
Import payments during the first nine months till March of the current fiscal year decreased by $95 million or 0.39 percent to $24.17 billion compared to the same period a year ago, according to BB data.
A dollar was sold at Tk 85-Tk 86 in January last year riding on a surge in demand. Now the dollar has come down to Tk 78, a rate for import payments although the central bank has been buying a huge amount of the greenback in recent months.
“Commercial banks are sitting on a huge amount of foreign currency (dollar) due to a fall in import demand. The BB buys the dollar at the request of the banks,” said Yusuf Khan, deputy managing director of Mercantile Bank.
A BB official, however, ruled out the allegation that buying of the greenback is inconsistent with the floating exchange rate regime and would fuel the inflationary pressure.
“Though we are injecting fresh money into the market, we are also mopping up the money through bonds and treasury bills,” said Kazi Sayedur Rahman, general manager of foreign exchange reserve and treasury management department of the BB.
Rahman said 15 percent growth in remittances and 11-12 percent growth in exports have increased the flow of foreign currency into the market in the outgoing fiscal year. He said a negative growth in imports has contributed to the rise in the foreign currency reserve.
“Our intervention has helped the exporters and remitters,” Rahman said.

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