The Bangladesh Bank has foreseen a forthcoming dip in the US dollar’s price, attributing it to a dwindling demand for foreign currency within the nation amidst shrinking imports. Recently, a pivotal announcement unfolded during a press conference at the central bank headquarters, where Mezbaul Haque, the central bank spokesperson, applauded the recent joint initiative of the Bangladesh Foreign Exchange Dealers Association (Bafeda) and the Association of Bankers, Bangladesh (ABB) to trim the dollar’s value by Tk0.50.
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This reduction occurred amid banks procuring remittances at rates ranging from Tk121 to Tk122, with cash dollars exchanging hands in the open market at Tk123 to Tk124.
This reduction in the dollar’s value, a significant stride, materialized on Wednesday, November 22, 2023, harmonizing with the diminishing appetite for the greenback amid the contracting imports. The reverberations of this alteration extend beyond the national borders, hinting at a potential decline in global market loan interest rates.
Site LCs and decreasing debt payments on the horizon
Mezbaul Haque, with an air of optimism, remarked that as the foreign debt in the country’s financial account recedes, the trajectory of the dollar’s value is poised for a further descent. “Our scrutiny of imported product demands and their supply in recent months has exposed a surplus in the current account balance. Although our financial account is presently in deficit, we anticipate a positive shift in the days to come, with decreasing debt payments,” stated Haque confidently.
The trajectory of debt repayments holds the key; as the burden lightens, so does the demand for dollars. Haque elucidated that the majority of letters of credit (LCs) are now promptly settled, exercising control over the demand for dollars in the realm of imports.
In the dynamics of foreign exchange rates, market forces play the lead role, a point underscored by Haque. The global trend of reducing interest rates, a phenomenon echoed by central banks worldwide, is poised to be a contributing factor in the devaluation of foreign exchange. Coupled with this, the gradual normalization of the global supply chain is anticipated to exert an additional downward force on foreign exchange prices.
A beacon of positive financial news illuminated the discourse as Haque revealed a substantial decline in private sector foreign loans (short-term) from $16 billion in 2022 to $12 billion by September 2023, with projections forecasting a further reduction to $6.92 billion by September 2024. This trajectory, a testament to a positive financial shift, is expected to alleviate the strain on foreign loan repayments, ushering in significant benefits.
Banks buck the trend with surging dollar holdings
Amidst a depletion in the country’s foreign exchange reserves, there’s a paradoxical surge in banks’ dollar holdings—a trend persisting over the past two years and aligning with the ongoing dollar crisis.
As per the Bangladesh Bank’s latest data, the Net Open Position (NOP) of banks’ foreign currency holdings recorded a positive $192 million as of November 20, 2023. This signifies those 39 banks find themselves in possession of more dollars than they owe, an intriguing departure from the norm.
In stark contrast, the scenario was markedly different on November 20, 2022, where 31 banks grappled with a negative foreign currency NOP of $425 million. At that juncture, their liabilities exceeded their foreign currency assets.
The Foreign Exchange Net Open Position (NOP) of a bank serves as the difference between its foreign currency assets and liabilities at a given point. A surplus in assets renders a positive NOP (long), while an excess in liabilities results in a negative NOP (short).
While the NOP holdings maintain a relatively elevated status, it’s emphasized that this alone cannot negate the existence of an ongoing dollar crisis. The intricate interplay between reserves, holdings, and the overarching economic landscape underscores the complexity of the challenges at hand.
Actions to be taken to curb dollar rates
Rather than adhering to the proposed decrease of Dollar exchange rate, banks responded by offering substantially elevated rates, evidently in response to the burgeoning demand.
Reports from banks on Thursday, November 23, 2023 disclosed that remittance dollars procured from exchange houses reached an apex, with rates soaring to Tk121-122. This starkly contrasted with the Tk118-119.50 range just a day earlier.
An official from a leading bank revealed that, despite offering a rate of Tk117 on Thursday, no remittances were received, underscoring the market’s resistance to the proposed downward adjustment.
Under the new rate, banks were authorized to disburse a maximum of Tk112.75 for remittances using their own funds, with remitters entitled to receive Tk115.5, inclusive of government incentives. However, the stipulation dictated that banks could not charge more than Tk110.50 when selling these dollars.
Despite the planned implementation of the revised lower dollar rate on Thursday, certain banks chose not to comply.
Senior officials from multiple banks disclosed that the pinnacle of the dollar rate for remittances had surged to Tk124 on November 8. In response, the central bank convened a meeting with the managing directors of 13 banks the following day, issuing directives to curtail the dollar rate. Subsequently, inspections were initiated at banks to verify allegations of remittances being acquired at inflated prices.
Additionally, a policymaking officer from the central bank engaged with banks, urging them to align with the directive and reduce the remittance rate. As a consequence, banks curtailed their remittance purchases at the elevated rates, aligning with the central bank’s directive.
Lower rates as catalyst for remittance slowdown
A senior official from a private bank asserts that the recent decline in remittance inflow, in comparison to the previous week, can be attributed to the lower rates prevailing in the market. Shedding light on the intensified demand for dollars in banks, he explained, “The year-end has ushered in heightened demand for dollars, fuelled in part by the urgency of many banks to settle their overdue payments.”
The official underscored the criticality of timely payment settlement, as deferred import Letters of Credit (LCs) come with predetermined payment terms. Failure to settle these payments, for any reason, results in overdue payments, a predicament that, according to industry stakeholders, carries the potential to tarnish a bank’s reputation.
Dollar’s Decline Continues
Traders Anticipate Further Decrease: Amidst a market scenario resembling the taming of a wild horse, the dollar’s downward trajectory persists, with traders forecasting additional declines. This reduction is perceived as just the initial phase, setting the stage for further devaluation.
Remittances Surge: In a contrasting development, remittances, a vital source of foreign exchange reserves, are on an upward trend. This positive momentum aligns with the imminent arrival of the second tranche of the IMF loan scheduled for December. After a mid-year dip, remittances are rebounding, showcasing a positive economic trajectory.
Positive News Amidst Election Concerns: Professor Ainul Islam, the General Secretary of the Economic Association, sees the increasing remittances as promising news. He underscores the potential negative impact on the public if economic growth stalls before the upcoming election. The timely upturn and the expected second tranche IMF loan are viewed as positive signals, offering global implications. This positive momentum is crucial for enhancing reserve security, prompting a renewed focus on internal resources.
