Key Highlights:
- Bangladesh’s foreign currency reserves have experienced a significant resurgence, with officials noting that the central bank has acquired approximately US$1.0 billion from commercial banks.
- Emranul Huq, Managing Director and CEO of Dhaka Bank explains that commercial banks with excess foreign exchange holdings benefit from the arrangement by accessing local currency at a significantly lower rate of 2.7%.
- The currency swap officially commenced on February 20 with transactions totaling $155 million.
- The government had increased the yield rates of both the US Dollar Premium Bond and US Dollar Investment Bond by up to 2.0%, 2 months ago.
Bangladesh’s foreign currency reserves have experienced a significant resurgence, with officials noting that the central bank has acquired approximately US$1.0 billion from commercial banks in the last part of February through currency-swap transactions.
Due to increased sales of the American Greenback (US dollar) by financially strained scheduled banks, the total foreign exchange reserves, as calculated by Bangladesh Bank, rose to $26.17 billion as of March 5, up from $25.16 billion recorded on February 19. This increase occurred a day before the initiation of taka-dollar swaps.
You can also read: How Bangladesh’s Current Remittance Pushes Economic Growth!
The Greenback, serving as legal tender, represents a type of paper currency authorized by the United States government for transactions of goods and services. Given its widespread usage, it holds considerable sway in the global economy.
The influence of the greenback extends far into global trade and commerce, with its value holding sway over economies worldwide. For exporters, a heavy greenback translates to pricier goods, while a weakened greenback renders their products more affordable. Conversely, importers benefit from a strong greenback, as it lowers the cost of imports, but suffer when it weakens, as imports become costlier.
Moreover, the greenback’s value significantly impacts investment dynamics. A strong greenback presents challenges for investors eyeing overseas markets, as the exchange rate elevates the cost of investment. Conversely, a devalued greenback makes foreign investments more enticing, as the cost of investment decreases.
Currency Swap Gains Momentum in One Week
The currency swap officially commenced on February 20 with transactions totaling $155 million. Over the following 7 days, deals amounted to $941 million, with liquidity-starved banks selling US dollars to the banking regulator.
Under this mechanism, introduced by the central bank to allow banks to obtain local currency at a more favorable rate in exchange for surplus US dollars, banks facing shortages of local currency have been able to fulfill their obligations by selling US dollars.
In currency-swap transactions, banks sell their foreign exchange to the central bank at the prevailing spot rate, which currently stands at Tk 110 per dollar. The deal will be settled at a future date using the same exchange rate with a swap point based on the interest rate differential, taking into account the prevailing benchmark rates of foreign currency and the BB policy rate.
Shariah-compliant commercial banks exchange taka for approved foreign currencies at the spot rate, without considering rate differentials during currency swaps.
Bangladesh Bank’s Strategic Moves and Commercial Banks’ Windfall
Emranul Huq, Managing Director and CEO of Dhaka Bank explains that commercial banks with excess foreign exchange holdings benefit from the arrangement by accessing local currency at a significantly lower rate of 2.7% compared to the buy-back rate of 8.0%, by depositing additional foreign currencies with the central bank.
The arrangement also allows Bangladesh Bank to boost its foreign exchange reserves with the dollars deposited by banks, creating a mutually beneficial scenario for both parties. According to the IMF’s Balance of Payments Manual 6 (BPM6) methodology, the gross reserves increased to $20.98 billion as of the latest count, up from $19.97 billion on February 19.
With remittance and export receipts on the rise, the supply of foreign exchange or net open position (NOP) balances of banks has also increased. This occurrence is credited to Bangladesh Bank’s strategic allocation of reserve funds into diverse bonds and gold investments abroad. According to Bangladesh Bank statistics, 15 cash-strapped commercial banks have received Tk 103.51 billion from the central bank through dollar sales.
How Investment in Different Bonds Helped Bangladesh’s Forex Reserve?
The government had increased the yield rates of both the US Dollar Premium Bond and US Dollar Investment Bond by up to 2.0%, 2 months ago which encouraged greater foreign currency inflow into the country.
Following the adjustments, the profit rates for the US Dollar Premium Bond have been elevated to 6.5% from 4.5% after one year of investment up to $100,000, 7.0 percent from 5.0% after two years, and 7.5% from 5.0% after 3 years of maturity.
Similarly, the yield rate for the US Dollar Investment Bond has been raised to 5.0% from the previous 4.0% after one year of investment up to $100,000, 6.0% from 4.0% after two years, and 6.5% from 5.0% after three years of maturity.
Moreover, the yield rates on both bonds have been proportionately increased for investments exceeding $100,000 for terms of one, two, and three years.
As Bangladesh’s foreign currency reserves experience a remarkable surge driven by strategic initiatives and currency swaps, the nation’s economic panorama undergoes a profound transformation. With currency swap mechanisms rapidly gaining momentum within a mere week, coupled with strategic bond investments elevating reserves, Bangladesh adeptly maneuvers through the complexities of global finance with astuteness and vision. Through the adept utilization of financial instruments and judicious policies, the nation charts a path toward resilience and prosperity amidst the ever-evolving economic landscape.
