Taka loses more value as global currency market volatility persists

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The US dollar is strengthening. The Bangladeshi taka, like most major and minor currencies around the world, is expected to remain under pressure as import bills, inflated by global commodity price volatility, continue to outpace foreign exchange inflows, mainly through exports and remittances.

The interbank exchange rate was lifted by Tk 0.25 to Tk 86.7 per dollar yesterday, the second increase in less than two months. This is the rate between two banks. Customers must pay at least Tk 7 more per dollar.

Even banks are paying far more than the quoted rate to buy dollars from other banks to meet the urgent needs of business customers because they are not getting enough dollars from the central bank.

This additional cost is added to the cost of the company.

Even the priority purchase of fuel oil is also in trouble. The state fuel oil monopoly Bangladesh Petroleum Corporation is facing delays of 5-10 days in opening import LCs (letters of credit) for not receiving enough dollars from the Bangladesh Bank on time. prescribed rate. He got approval from the Department of Energy last month to buy dollars at the market rate if needed.

While the US dollar has been stronger for weeks than major currencies, the latest rate hike by the Federal Reserve has given further impetus to its strength.

The queen of currencies is now at its highest level in 20 years against rival currencies including the euro, one of the four reserve currencies of the global financial system.

The US central bank raised its benchmark interest rate last week in a bid to control rapidly rising prices with inflation at its highest level in 40 years.

Taka loses 25 paisa against the dollar

The Bangladeshi taka lost its value of 25 paisa within a day. On the interbank foreign exchange market, the taka traded at 86.7 per dollar on Monday, against 86.45 on Sunday.

Speaking of which, seeking anonymity, the head of treasury at a private bank told The Business Standard that the dollar market is now in a tight spot as there is more demand for outflows than inflows. .

The Bangladesh Bank yesterday raised the dollar rate by 25 paisa after reviewing the broader market.

But the greenback does not trade at the fixed central bank rate in the interbank foreign exchange market because the market rate is higher, he said.

Also, banks do not receive dollars from the central bank in proportion to the number of LCs they have opened. This is why they buy dollars at higher market prices.

“We have an extreme dollar crisis. We do not receive greenbacks from the central bank to make large payments. The dollars we get from the central bank are not even half of what we need; so we have to spend another 5,000,000,000. 6 to buy dollars on the market, which makes banks suffer financially,” the official pointed out.

The value of the taka fell to Tk 86.45 per dollar in the interbank foreign exchange market on May 9, which was Tk 84.80 on the same day in 2021.

The foreign exchange market was more or less stable at the level of 84-85 Tk for three years until 2021, before reaching 86 Tk per dollar in January this year. The interbank exchange rate reached Tk 86.20 in March and remained the same until the end of April.

Although the exchange rate was 86.7 Tk in the interbank market, banks sold dollars to customers at 90 Tk-92 Tk. In the curbside market, it was sold at Tk92-93 on Monday.

The local currency lost value against the greenback due to the increase in the value of imports due to the surge in global commodity prices due to the pandemic and the Russian-Ukrainian war.

As the economy began to recover from the pandemic pause, demand for imports of crude oil, food products and industrial raw materials surged. Soaring world prices for everything were a major contributor to a 44% growth in the value of imports in the nine months to March of the current fiscal year.

Although exports grew by about 33% over the same period, they could not prevent the trade balance from slipping to a deficit of about $25 billion in nine months, or 9% of more than that of the whole of the previous financial year.

The current account is also in the red, with a deficit above $14 billion despite some growth in remittances in recent months.

Global central banks, including the Bank of England and the Reserve Bank of India, are raising policy interest rates to control imports to contain soaring inflation.

Should the Bangladesh Bank weigh a similar option to prevent imports from inflating further? Or should it release more dollars into the market to normalize the forex market?

Such thoughts come to the fore as the US dollar becomes more expensive, breaking the stability of the exchange rate for years.

The foreign exchange reserve, seen as a strong defense against any external sector vulnerabilities, has also shrunk, limiting the role of the central bank to intervening by buying or selling dollars “to maintain orderly market conditions”.

When import demand bottomed out during Covid-19, the central bank bought dollars from banks, which helped it boost its foreign exchange reserves to $48 billion in August. last year.

As demand for dollars increased due to increased imports, the central bank began selling dollars based on demand, releasing $521 million to banks in April alone. Bangladesh Bank has sold more than $4 billion to banks in the past nine months, Md Serajul Islam, the central bank’s chief executive and spokesperson, told TBS last month.

With reserves falling to $44.15 billion in March from $45.8 billion the previous month, the central bank appears to be cautious in its intervention as treasury officials at some banks have told TBS that they will not were not getting enough dollars from the central bank as they had requested.

The reserve is expected to drop another $2 billion after the Asian Clearing Union payment due today.

What BB can do now

Inflation was not a concern as it averaged 5-6%, but now it seems that the official rate does not reflect reality, says Dr Salehuddin Ahmed, former Governor of Bangladesh Bank.

If you look at people’s purchasing power, actual inflation could be much higher, he said.

“It’s the practice when inflation rises, the currency is depreciated or devalued to some degree to help exports stay competitive. But that’s not done in Bangladesh. And they [authorities] deal with things on a piecemeal basis,” observes Dr Salehuddin Ahmed.

“It’s time to think about inflation, our competitiveness and the exchange rate,” he says.

He also believes that the recent increase in credit to the private sector should be examined to see if the money has gone to the productive sectors.

“The time has come to be prudent in monetary policy and to review interest rates,” he told TBS. “The loose monetary policy benefits the big players, the little fries actually don’t get loans at low interest rates,” he points out.

On the widening gap between the dollar rate at banks and the curbside market, the former central bank governor says it’s not a good sign and suggests regulators check to see if there’s a flight of currency out of the country.

“Wait-and-see policy will not bring any good. The crisis has snowballed in Sri Lanka over the past 4-5 years as the country has not acted properly to fix things. I wish Bangladesh would not not follow the same path.”

The increase in interest rates reduces the demand for imports and thus keeps the demand for dollars and inflation in check.

But there are fears that the end of loose monetary policy and the increase in the key rate will make money more expensive for businesses.

Dr Salehuddin says the policy rate needs to be reviewed as he believes many other factors need to be improved to help businesses recover quickly from the pandemic.

“If other bottlenecks remain unchanged, lower interest rates alone cannot help businesses thrive,” he said.

It’s not a dollar crisis, but it’s pressure on the taka, which could linger for some time to come, says Syed Mahbubur Rahman, managing director and chief executive of Mutual Trust Bank Limited.

As import growth outpaced export growth and the trade deficit widened, putting further pressure on the foreign exchange situation, the central bank is using its reserves cautiously, he said.

But Bangladesh should not opt ​​to raise the policy rate now, he said.

Along with initiatives to boost exports and remittances, the principal banker feels the urgency of a vigorous foreign investment drive to help the country overcome currency volatility.

Higher dollars are costing businesses and consumers are the ultimate victims, says Rizwan Rahman, president of the Dhaka Chamber of Commerce and Industry.

“Forex market volatility can persist for at least three to six months. Companies need to feel the shock until the forex market stabilizes somewhere after the price correction,” he also says, hoping that the problem could be temporary.

Since this is a global phenomenon and is developing every two days, the leader of the trading body suggests the central bank to keep a close eye on the “chart”.

“If it doesn’t seem volatile, watch further. Because any irrational action taken suddenly can lead to more problems,” Rizwan said, when asked if the central bank should raise rates or devalue the taka.

Humayun Kabir, the central bank’s acting executive director and spokesperson, told TBS: “Our imports were low during the pandemic. At that time, the central bank bought excess dollars from the banking system to maintain the stability of the foreign exchange market. As a result, the country’s reserves reached $48 billion in August last year.”

Foreign exchange reserves have now fallen a little due to an increase in imports in the post-pandemic period and their higher payments caused by higher commodity prices in the international market.

To reduce pressure on reserves and keep inflation under control, the Bangladesh Bank may enforce certain import restrictions even without raising its policy rates, such as repo rates and bank rates. And the central bank does.

The central bank has a 25% margin on opening LC for non-essential items to keep pressure on the foreign exchange reserve. In addition, the dollar rate has been raised from time to time depending on supply and demand.

Thus, imports will decrease a bit and remittances through formal channels will increase, Humayun Kabir noted.

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