Bangladesh Bank sold a record of $7.62 billion directly to commercial banks from the foreign exchange reserves to stabilize the forex market in the just-concluded 2021-22 fiscal year.
Market analysts said the Central Bank has never released such a high amount in the history of Bangladesh in a fiscal year.
Even then, market volatility is not cutting it, they said, adding that this crisis has occurred due to the demand for US dollars rising significantly in the inter-bank foreign exchange market as the country's import demand had picked up recently and the remittance inflow declined as well.
However, the supply of dollars is less than the demand in the market. That is why Bangladesh Bank is selling dollars from the forex reserves to the banks at interbank rates every day.
Md Serajul Islam, Bangladesh Bank executive director and spokesman, told Bangladesh Post, “Imports of all kinds of products, including industrial raw materials and capital equipment, increased due to the return of favorable investment climate in the country after the Corona. Apart from this, the cost of imports was also increasing due to the abnormal rise in prices of all commodities including fuel oil and food products in the world market.”
Some steps have been taken by the central bank to reduce imports, he said, adding that the government has also taken some steps.
“Hopefully, imports will come down gradually now. The money market will also return to normal,” he mentioned.
“The central bank's job is to keep the money market stable,” he said, adding that the dollar was bought when there was a supply of foreign exchange in the market. Now that supply has dwindled, the central bank is selling dollars in line with market demand,” Islam said.
However, the Bangladesh Bank devalued the value of taka against the dollar the last several months to stabilize the forex market.
The central bank depreciated the local currency 10 times against the US dollar within about a month from Tk 89 on 01 June to Tk 93.45 per US dollar on 07 July.
Market analysts said the central bank usually sells US dollars directly to commercial banks to meet higher demand for the greenback. It is a sign of the economic stability of the country, they added.
Although in the interbank forex market, per dollar sold at Tk 93.45, the greenback sold at the rate of Tk 96 to Tk 98 in the open or curb market.
The central bank has no direct control in the open market. However, if the banks sell dollars at higher prices, Bangladesh Bank intervenes because the banks buy dollars from the central bank at the interbank rate and sell those dollars.
Even selling dollars to the commercial banks is not going to control the price.
Due to the Corona pandemic, imports fell sharply during the last fiscal year 2020-21, but remittances and export earnings have jumped.
That is why the supply of dollars in the market has increased. In that scenario, the central bank bought a record of about $8 billion in the last fiscal year to keep the dollar afloat.
In its continuation, in the first month of July of the current 2021-22 fiscal year, 205 million dollars were bought.
However, since August 20, the picture has reversed. As the Corona situation began to normalize, imports began to increase rapidly.
Although export earnings increased, remittance inflow continued to decline. Besides, foreign exchange reserves also decreased.
Meanwhile, since August 2021, the demand for dollars in the market has increased. Besides, the dollar also appreciated against the local currency. As part of its move, Bangladesh Bank started selling dollars from August to keep the market stable, which is still continuing.
According to the central bank, on August 5 last year, the dollar was sold at Tk 84.80 per dollar in the interbank market.
The dollar has been 'stable' in this same place for more than a year. Since then, the value of the United States currency has continued to rise.
It is calculated that in the last 10 months, the value of the dollar against Bangladeshi currency has increased by about 10 percent.
Ahsan H Mansur, economist and chairperson of Brac Bank, said, “The dollar market is really volatile. Bangladesh Bank is not able to keep the market normal even after selling a lot of dollars from the reserves. I don't think the market can be restored to normalcy by intervening in this way.”
The import has sharply risen after the Corona situation returned to normal, he pointed out, adding that remittance inflow has reduced in recent times, which also put pressure on the forex market.
“Although the export earnings are growing, it cannot meet demand on the forex market,” he said.
However, Bangladesh's reserves are under pressure due to increased imports.
The country will have to settle import payments worth $1.96 billion with the Asian Clearing Union (ACU) next week which may decrease below $40 billion once the Bangladesh Bank adjusts the import payments.
The country's foreign currency reserves stood at $41.98 billion on Wednesday in contrast to $46.15 billion in December last year.
The ACU is an arrangement through which participating countries settle import payments for intra-regional transactions.
Bangladesh, Bhutan, India, Iran, the Maldives, Myanmar, Nepal, Pakistan and Sri Lanka are members of the Tehran-headquartered ACU. The BB has to make the payments every two months.
Over the past four months (January, February, March and April), the country has been importing more than $8 billion worth of goods every month. As such, it is possible to meet the import cost of five months with this reserve.
On August 24 last year, the reserves crossed the $48 billion milestone, surpassing all past records.
