Foreign exchange holdings in commercial banks have reached unprecedented levels as of June 2024, primarily driven by an increase in remittance receipts. This cause, coupled with reduced import payments and recent incentives, according to sources, added a new dimension to the growth of Forex holdings.
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This surge in foreign currency, particularly the US dollar, offers a measure of relief to the economy. The economy that exceeds $460 billion has recently been grappling with various macroeconomic challenges, including a rapid decline in forex reserves, as noted by officials and bankers.
Offshore deposits drive economic resilience.
Notably, the newly implemented Offshore Banking Act of 2024 has played a significant role in attracting both individuals and institutions with foreign currency, further bolstering the forex reserves within bank vaults. By the end of June 2024, commercial banks held gross foreign exchange reserves amounting to $6.10 billion, representing a remarkable 21% increase from $5.
The latest data from Bangladesh Bank (BB) reveals that June’s count of outstanding forex holdings in banks is the second-highest in history, surpassed only by the $6.17 billion recorded in September 2023. Previously, as part of its efforts to bolster reserves, the central bank implemented a crawling peg system, appreciating the exchange rate from Tk 110 to Tk 117 per dollar on May 8, 2024. This strategy has successfully attracted more remittances to flow inward.
- Highest Forex holding: September’23 – $6.17 bn
- Second Highest Forex Holding: July’24 – $6.10 bn
Additionally, the government recently enacted the Offshore Banking Act 2024, offering attractive incentives such as a 9% interest rate and flexible withdrawal options for depositors.
These measures are significantly enhancing the inflow of foreign currencies and strengthening Bangladesh’s reserves.
Record remittance inflow ignites the hope.
According to BB data, the country’s gross foreign reserves surged to $21.79 billion by the end of June, up from $18.65 billion in the previous month, based on the IMF’s BPM6 calculations.
Foreign Reserve surge in total:
- June’24: $21.79 bn
- May’24: $18.65bn
Experts attribute the banking sector’s record remittance inflow in June, coupled with a decline in import orders and settlements, as key factors for the increased forex reserves in commercial banks.
Bangladeshi expatriates sent home $2.54 billion in June, marking the highest remittance in 47 months since July 2021, according to central bank data. Numerous banks recently secured significant forex volumes through bilateral agreements with overseas lending agencies, further bolstering their forex reserves.
The continuous growth in forex deposits in RFCD (Resident Foreign Currency Deposit Account) and NFCD (Non-Resident Foreign Currency Deposit Account) is also a notable factor, facilitated by the new offshore banking law.
As per the latest act, the banks are not inquiring about the sources of foreign currencies, and they are offering the highest rates in history.
The amount was saddening till May!
Before this turnaround of the increase of Forex stock in commercial banks, till May, the gross foreign exchange holdings by commercial banks continued to decline, influenced by factors such as currency swaps and a growing deficit in trade credits.
Despite Bangladesh Bank’s (BB) forex-saving measures, the surge in import orders has also contributed to the reduction in forex stocks. Central bank data shows that the gross forex reserves in banks were $6.17 billion in September 2023, dropping to $5.97 billion in November and further to $5.56 billion in December 2023.
Timeline of Commercial Banks’ Forex Holding:
- September’23: $6.17 billion
- November’23: $5.97 billion
- December’23: $5.56 billion
- May’24: $5.25 billion
- July:24: $6.10 billion
Though there was a brief increase to $5.84 billion in January, the reserves began to decline again, falling to $5.53 billion in February and $5.43 billion by the end of March.
Sources indicate that the decline in forex holdings began in February 2024, when the currency swap arrangement between the central bank and commercial banks was implemented. This mechanism allowed banks to obtain liquidity by selling their excess US dollars to the central bank, which then depletes the overall forex reserves.
Currency Swap didn’t respond up to the mark!
Since the introduction of the currency swap, commercial banks’ involvement in this arrangement has significantly increased, leading to a drop in their gross forex stock.
Moreover, the trade credit deficit ballooned to $10.75 billion by February, indicating that commercial banks are not receiving the expected dollar inflows from abroad. As a result, banks couldn’t account for these dollars, which was another major factor behind the continuous decline in their gross forex holdings.
Sources at Bangladesh Bank (BB) revealed that the currency swap was introduced in the money market on February 20, 2024, to alleviate liquidity pressures in banks following a contractionary monetary policy. Since its inception, commercial banks sold over $3 billion to the central bank, receiving approximately Tk 370 billion in return by April 25, 2024. During the same period, banks swapped $1.80 billion, obtaining around Tk 200 billion.
In addition to currency swaps and trade credits, the volume of letters of credit (LCs) has also surged due to a significant increase in dollar supply from exports and remittances.
This was another factor contributing to the decline in the banks’ gross forex holdings. However, Banks still maintained a substantial dollar reserve and were managing it with great caution, for which, the sector recorded the turnaround of the reserve at present.
Banks were selling more dollars in the market to address liquidity pressures, while overseas liabilities in the form of deferred payments continued to decrease.
These were additional reasons behind the reduction in the gross dollar stock in banks.
