Dollar feeding into banks rises inexplicably

Dollar feeding by the central bank to stabilise the market of foreign currencies continues even as forex holding of the commercial banks marks a significant increase in recent times.

The nation's falling foreign-exchange reserves bear further pressure for such continuous injecting of the US currency by the Bangladesh Bank (BB) into the banks that remains a matter of concern to some bankers and economists.

Shortly after the Russia-Ukraine war broke out, Bangladesh came under immense pressure as far as its forex reserves are concerned from early last fiscal year (FY'23) because of quick fall in forex holding with the commercial banks in the wake of significant rise in import costs globally and less-than-expected levels of earnings from remittance and export receivables.

Since then, the central bank, as part of its market intervention, has intensified the sale of the greenback from its reserves to the banks to help them meet their foreign-currency obligations amid dollar dearth, BB sources said.

But, since mid-January last, riding on various dollar-saving moves on part of the central bank, the stock of forex, particularly the American greenback, has been on an upturn.

According to BB statistics, the central bank had sold a record volume of $13.58 billion while buying only $192 million from the banking sector in the financial year of 2022-2023.

The forex-starved banks have so far bought $10.30 billion until March 20, 2024 of this fiscal year (FY'24) spending over Tk 1.13 trillion.

Of the dollar buy from the BB, the banks bought $177 million through the window of currency swap while the remaining part was bought through the regular dollar sale-buy activities of the central bank.

On the other hand, the central bank had purchased $3.52 billion till March 20, 2024 at the expense of around Tk 388 billion. Of the forex trade, the BB paid around Tk 176 billion to the banks to buy $1.59 billion under the currency-swap mechanism.

Seeking anonymity, a BB official says the foreign-currency stock with the commercial banks keeps improving in recent times because of factors like import restrictions, rise in remittance and submission of growing export proceeds.

This rebound was supposed to give some respite to the country's forex-reserve situation in this challenging period of time. "But it was not happening as the rising trend in sale of dollars by the BB from its reserves to the banks continues, and it is putting more pressure on the reserves," the central banker notes.

The banking industry has been facing various problems like LC (letter of credit) opening because of the shortfall of the foreign currencies, particularly the American greenback, for months.

Even, starting from this calendar year, the NOP in the banking sector has been found negative or short positioning. But things started improving in the middle of January.

According to statistics available with Bangladesh Bank, the NOP was $40-million negative on January 1st, 2024. The following day, the deficit in forex positioning went past $100 million.

Since then, the stock of the greenback in banks has kept improving towards positive territory, reaching over $500 million in positive strand on March 20, 2024, the data showed.

Another BB official, also preferring anonymity, says they have been supporting state-owned commercial banks, in particular, with necessary greenback to enable them to clear government import bills on items like fertiliser, food, petroleum and mineral products.

Apart from rising inflow of remittance and export receipts, says managing director and chief executive officer of Jamuna Bank Mirza Elias Uddin Ahmed, there is a group of people who hold forex in hand over expectation of further rise in the exchange rate.

As the rate is not increasing because of various policy instruments of the BB, they changed their mind and started releasing the forex on the market. "As s result, the forex-holding situation in the banks continues improving, which is a good sign," he told the FE writer.

"It does not mean we overcome the hurdle of forex dearth as there is still a significant gap in the financial account. But things are improving," the bank's top executive said.

According to the BB data, the gross volume of forex reserves stood at $25.25 billion as of March 20, 2024 by BB's official count, but the net reserves volume under the IMF's BPM6 manual is equivalent to $19.99 billion.

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