In response to the persistent challenges surrounding foreign currency reserves, Bangladesh Bank has embarked on a series of strategic initiatives aimed at shoring up the nation’s economic stability. These initiatives, mainly targeted at offering competitive interest rates demonstrate a multifaceted approach to fortify the country’s foreign currency reserves.
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Bangladesh Bank’s recent announcement regarding the provision of a 7% interest rate on Resident Foreign Currency Deposits (RFCD) signifies a shift in the country’s financial landscape. More than just a lucrative offer for depositors, this move serves as a strategic response to the ongoing dollar crisis. The central bank’s decision, communicated through a notification to all commercial banks, not only encourages the deposit of $10,000 as RFCD but also mandates a minimum 1.5% interest on these deposits along with the benchmark rate.
Beyond the financial incentives, the initiative expands its allure by permitting the issuance of two supplementary cards against the deposit. This flexibility extends to dependents, allowing children or siblings to utilize the card. Furthermore, educational expenses abroad and medical costs for dependents can be covered from this account. This comprehensive approach underscores the central bank’s commitment to addressing the multifaceted challenges associated with the depleting foreign currency reserves.
Targeting remitters, Bangladesh Bank has introduced an initiative, allowing remitters to deposit foreign currencies, including dollars and pounds, with an attractive interest rate of up to 9%. The circular issued by the central bank outlines the eligibility criteria, extending this service to various entities, including Bangladeshi expatriates, domestic entities, joint ventures, and foreign companies.
Crucially, the interest payments on these deposits will be disbursed in the corresponding currency, a feature that aligns with the central bank’s commitment to providing favorable terms to customers compared to foreign banks. The interest rates are meticulously structured, offering reference rate +1.50% for three months to one year, reference rate +2.25% for 1-3 years, and reference rate +3.25% for 3-5 years.Considering the current SOFR rate of 5.35% for dollars, a customer depositing for a 3-year period would yield an approximate interest rate of 8.60%.. This approach not only ensures competitiveness in attracting deposits but also facilitates the seamless remittance of deposits and accumulated profits abroad.
Further Steps Necessary:
While the interest rate initiatives are commendable. More can be done to bolster the reserve and reduce currency flight. Investigations and reports in the past two years have revealed that comprehensive illicit mechanisms exist to cater to illegal money laundering and bypassing the entire banking system. These “schemes” not only help launder money abroad, but also deprives the government from a sizeable portion in forex earnings.
Crack Down on Mis-Invoicing
An alarming revelation comes from the Bangladesh Financial Intelligence Unit’s annual report, indicating a 62% increase in suspicious transactions through banking channels. The anti-money laundering agency has identified over-invoiced documents ranging from 20% to 200% during the fiscal year 2021-22. At a time when the nation grapples with the gradual depletion of its forex reserves, experts emphasize the need for stringent measures to combat mis-invoicing.
Global Financial Integrity (GFI) reports suggest that Bangladesh lost an average of $8.27 billion annually between 2009 and 2018 due to mis-invoicing by traders. To address this, the implementation of strict monitoring and severe punishments is crucial. Economists Zahid Hussain and Ahsan H Mansur underscore the significance of stopping over-invoicing to check money laundering effectively. They propose a meticulous cross-checking process when invoices are submitted to the National Board of Revenue (NBR) to ascertain the realism of prices.
Hammering the Hundis:
The illicit flow of funds through channels like Hundi poses a significant challenge to legal remittance and exacerbates the loss of precious foreign currencies during the ongoing forex crisis. The Criminal Investigation Department (CID) reports transactions of around Tk22,500 crore per month, a considerable portion of which is laundered through Hundi.
On September 2022, The Criminal Investigation Department (CID) of the police revealed an alarming statistic. Approximately 5,000 illegal agents of Mobile Financial Services (MFS) across Bangladesh have laundered an estimated Tk75,000 crore in a year.
These agents also laundered money through hundi, consequentially, Bangladesh was deprived of remittances earnings equivalent to a staggering Tk25,000 crore – which is about $7.8 billion dollars, in four months, confirmed The Criminal Investigation Department (CID) of the police.
The involvement of registered money exchangers in illegal forex and Hundi trade adds complexity to the issue. The suspension of 480 Mobile Financial Service (MFS) agents’ accounts involved in remittance transfers through unauthorized channels demonstrates a proactive stance. However, a more comprehensive analysis is required to understand the intricacies of the Hundi business fully.
Understanding the Dynamics of Hundi
A nuanced understanding of the Hundi business reveals both demand- and supply-side dynamics. Conventional thinking often overlooks critical elements in these dynamics. While remitters abroad demand services offered by the Hundi business, there is also a substantial demand in Bangladesh for these services among those emgaged in illicit money transfers.
To build a complete picture of this system, it is essential to introduce another actor in Bangladesh – individuals or groups seeking to siphon off illicit money abroad. The taka collected by local Hundi operators from money launderers is used to pay the families of remitters in Bangladesh in exchange for the US dollar collected from those remitters in foreign countries.
The government’s approach to this issue should be unyielding, adopting a zero-tolerance policy. Establishing a special tribunal and enacting new laws with severe and long-term punishments, including the confiscation of launderers’ assets, would be a step in the right direction. Addressing both demand- and supply-side dynamics in the Hundi business is crucial for a comprehensive solution.
A Symbiotic Effort for Economic Stability
Bangladesh Bank’s initiatives, coupled with the government’s proactive role, exemplify a joint commitment to addressing the foreign currency crisis comprehensively. By promoting legal remittance channels the authorities are not only providing immediate relief but also laying the groundwork for sustained economic stability. However, more needs to be done to combat the illicit, underground transactions by hundi as well as mis invoicing. The loss of such significant amounts of foreign currency(more than $16 billion dollars) to illicit trading is unacceptable in any period of time; in a time when the forex reserve is in a constant strain, the loss of such staggering amounts is intolerable.
A Resilient Financial Ecosystem
Bangladesh Bank’s strategic initiatives stand as a testament to the nation’s resilience and adaptability in the face of global economic challenges. The combination of attractive interest rates, crackdowns on mis-invoicing, and measures against illegal remittance channels forms a holistic strategy. As the government and the central bank work in tandem, these initiatives not only provide immediate relief but also pave the way for sustained economic stability. Bangladesh is navigating through turbulent financial waters with a comprehensive and strategic approach, showcasing its commitment to securing a stable and prosperous future.