Saturday | 11 January 2025 | Reg No- 06
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Saturday | 11 January 2025 | Epaper

Strong monitoring needed for stabilising forex market

Published : Saturday, 18 November, 2023 at 12:00 AM  Count : 621
Nazmul Karim
The steps taken by commercial banks of giving additional 2.5 per cent cash incentives from their fund to remitters along with 2.5 per cent are likely to boost remittance earnings amid ongoing crunch. In this extra incentives now remitters are getting Tk110.50 plus 5% which equals to Tk116 per dollar.

The government introduced a 2 per cent incentive in 2019 for remittances sent through legal channels, which was later raised to 2.5 per cent.   

Since the central bank's unleashing power the commercial bankers' association and foreign exchange dealers association are jointly fixing dollar rates and time to time they refix as per the market demand and supply.

Remittances in Bangladesh increased to 1977.56 USD Million in October from 1334.35 USD Million in September of 2023. Remittances in Bangladesh averaged 1426.61 USD Million from 2012 until 2023, reaching an all time high of 2598.21 USD Million in July of 2020 and a record low of 856.87 USD Million in September of 2017. This means the latest measures are in support of remittance inflow.

The decision that banks would offer extra incentives came amid the government's various initiatives to stabilise the foreign exchange market. The Bangladesh Bank introduced a market-based dollar rate in September last year. It also instructed banks to increase the dollar supply. Besides, it has continued support for banks to open letters of credit for importing essential goods.

It was expected that leaving the dollar rate to the market will level the playing field because everyone will then negotiate with customers to determine the rate. But in practical though remitters are being benefitted the importers are paying high and in many cases dollars are not available.

Dollar prices in open market are reckless. Money exchange houses in different areas, including Dhaka's Dilkusha and Gulshan, sell dollars at arbitrary prices. In some places, customers are Officials of the Bangladesh Bank believe export earnings of nearly $1 billion have remained stuck abroad for two years. The central bank wants to bring in the money to tackle the dollar crisis. However, many exporters involved with the money have closed their businesses while some have left the countr up to Tk118-120 for every dollar. There is a desperate need for dollars among various groups, especially those who want to go overseas for studies and patients seeking medical treatment abroad.

Bangladesh's foreign exchange reserves stood at record $48 billion in 2021. The government was keen to raise it $50 billion. But now the figure has dipped below $20 billion as per the International Monetary Fund's calculation method. Gross reserves, which include the Export Development Fund and loans from reserves, stood at $26.68 billion on 19 October. Despite this high amount of reserves why it fell rapidly. Why the government could not monitor the market.

The increased prices is badly affecting imports causing slow growth in manufacturing and due to higher costs of production inflation is on rise.

The banks are selling US dollars at higher rates due to higher demand for dollars in the market. The businesses have to buy dollars from the open market (money exchange) to open letters of credit for imports.

Market insiders said the US dollar supply came under pressure as the country's import payments are exceeding the export earnings.

The situation has also heated up the commodity market.

The businesses are bound to buy dollars from the open market for LC opening.

Amid this growing crisis there are several steps that could be followed to stabilize forex market.

In an effort to establish a comprehensive policy for ensuring a stable foreign exchange market and curbing money laundering to retain precious dollars within the nation, the Bangladesh Bank has undertaken various measures over the past year.

It introduced a range of exchange rate mechanisms and innovative pricing strategies for forward trading. Regrettably, these measures failed to achieve their intended goals of containing inflation and stabilizing the diminishing foreign exchange reserves.

The abrupt shifts in the exchange rate regime added to the complexity. Initially, a unified exchange rate was slated to be introduced, aiming to alleviate pressure on forex reserves. However, within a short span of four months, the central bank reversed its stance, opting not to pursue a free float exchange rate just before the national elections scheduled for 7 January, 2024.

The uncertainty in exchange rates raises concerns about inflation, as market-driven rates might result in further inflation. This, in turn, would push up import costs, posing a challenge to the country's economy.

Despite the introduction of a unified exchange rate, the desired results have been elusive due to implementation delays. Consequently, the central bank had to resort to selling dollars from its forex reserves, shedding a substantial $13 billion in the last fiscal year, equivalent to over a billion dollars each month. An additional $3.7 billion was depleted in the first quarter of the current fiscal year.

The challenge further deepens as banks have set the dollar sales price at Tk111 per unit for importers. However, in practice, many business entities find it challenging to secure dollars at this rate. Importers often negotiate at higher prices, circumventing the official rate.

In light of these developments, it is clear that the Bangladesh Bank faces a complex task in devising a policy that not only stabilizes the foreign exchange market but also safeguards the nation's precious dollar reserves, while simultaneously addressing issues such as inflation and informal channels for remittances.

The writer is Managing Director and CEO of Bridge Chemie Limited



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