Forex crisis eases considerably but not resolved: Top bankers

The pressure on the foreign exchange market has eased significantly compared to a year ago thanks to the central bank's intervention but it has not been completely resolved yet, top bankers have observed.

"There is still a shortage of dollars," said Selim RF Hussain, chairman of the Association of Bankers, Bangladesh (ABB) – a platform of chief executive officers (CEOs) of banks.

"Most banks are now regular in foreign payments, although there might be some issues with only 2/3 banks," he said during a press conference on the "Bangladesh Banking Sector Outlook 2023" organised by the association.

Selim RF Hussain, also the managing director of Brac Bank, said foreign corresponding banks that had previously withdrawn their credit limits are now returning, as they are satisfied with the current state of the country.

He highlighted the improved sources of foreign currency and mentioned that banks can now open letters of credit (LCs), although not for all transactions.

"Previously, banks would open LCs without considering the payment capacity, but now they have moved away from this practice," he said, adding that banks are now more cautious in this regard as the central bank has instructed lenders to open LCs based on their payment capacity.

Citing an example, Selim RF Hussain mentioned that typically, the monthly import through Brac Bank was $12 million, which decreased to $2 million to $3 million last year due to the dollar crisis. However, he mentioned that the monthly LC opening has now improved to $8 million, and the bank expects it to increase to $10 million soon.

The ABB chairman further noted that the price monitoring of imported goods by the Bangladesh Bank has helped in reducing trade-based money laundering and has also resulted in a reduction in imports.

The association came up with the forex market development for the first time since the country has been suffering for acute dollar crisis for last one year.

The leaders of the association claimed that the improvement in the forex market is significant, especially considering that the country's current account balance and financial account both are in deficit.

According to Bangladesh Bank data, the country's financial account deficit stood at $2.2 billion in July-March of the current fiscal year, a significant decline from the surplus of $12 billion recorded in the same period a year ago. However, the current account deficit has narrowed to $14.6 billion during the period, compared to $25 billion previously.

Selim RF Hussain stated that the financial account has turned into a deficit after many years, and there are several reasons contributing to this. One reason is the slowdown in development projects, which has led to the delay in foreign payment releases. Additionally, the commercial payments of multinational companies and airlines in Bangladesh have been stuck with foreign banks, further adding to the situation.

He also mentioned that high devaluation has exerted pressure on the external market. "Our currency was overvalued for a long time, and in the last year, it has depreciated by nearly 25%. Such a sharp devaluation is unprecedented," he remarked.

It was noted that the country experienced a sharp devaluation of 21% since the beginning of the previous year. Currently, reserve selling rate which is considered as reference rate is Tk104.50, compared to Tk85.80 at the beginning of last year.

The high fluctuation in the dollar rate has compelled the Bangladesh Bank to introduce multiple exchange rates. Presently, the dollar rate for imports and remittance is Tk108, and it is Tk106 for exports.

Last year, there was a gap of over Tk10 between dollar rates in the formal market and the informal market. However, this gap has now reduced to a maximum of Tk1 as the forex market has stabilised to some extent, mainly due to the decrease in imports.

The LC opening reached a 32-month low to $4.30 billion in last April due to a combination of restrictions imposed by the central bank and the ongoing dollar crisis.

Additionally, LC settlement reached a 21-month low to $4.69 billion in April, mainly due to a significant decline in LC openings witnessed in recent months, according to data from the Bangladesh Bank.

Mashrur Arefin, vice chairman of the ABB and managing director of City Bank, expressed optimism that the financial account will turn positive as Bangladesh is set to receive an $8.5 billion loan from the IMF, World Bank, and Asian Development Bank.

He mentioned that a significant amount of investment has flowed into the US market following the increase in interest rates by the Federal Reserve. Bringing back those investments will require time and effort.

Moreover, major external indicators have improved – net opening position of dollar holdings of banks turned to surplus $38 million from the shortfall of $600 million last year as remittance inflow and export earnings are rising. 

Besides, the dollar rate gap between the formal and informal markets is narrowing, which means the banking sector is returning to stability.

He said the dollar rate for remittance is Tk110.70, including a 2.5% incentive. On some days, the rate is even lower in the informal market.

He said that depositors' confidence has been restored, which is evident in the increasing deposits. Mashrur Arefin also highlighted that there is now an excess liquidity of Tk1.35 lakh crore, saying, "Although the liquidity situation in the country has not completely returned to the pre-crisis level, the situation has improved significantly."

"We are not saying that dollar crisis has entirely gone but things are getting resolved," he said.

He said price verification of imported goods, hundred percent LC margin and discouraging imports of luxury goods by the Bangladesh Bank have helped to improve the situation.

He said previously the monthly import amount was $7 billion, which has now decreased to $4.5 billion, resulting in a reduction of $2.5 billion in imports. Out of this reduced amount, $1 billion is accounted for by raw materials of the garment industry and other sectors, while the remaining $1.5 billion has been saved from trade-based money laundering.

He added that the strong monitoring by the Bangladesh Bank has played a crucial role in significantly reducing trade-based money laundering, thereby helping to alleviate the dollar crisis.

At the press conference, Abul Kashem Md Shirin, managing director of Dutch-Bangla Bank, Syed Waseque Md Ali, managing director of First Security Islami Bank and Md Ahsan-uz Zaman, managing director of Midland Bank, were also present.

Question-answer session later, the ABB leaders came up with their observations on various issues.

Asked why the central bank has to verify now when banks are now opening LCs, Mashrur Arefin told reporters that the gap between the dollar rate in the formal and informal market has reduced compared to before.

"Earlier, we used to import an average of $7 billion per month, which has now dropped to $4.5 billion. That is a decrease of $2.5 billion. Of this, imports other than RMG fell by about $1 billion. A large portion of the remaining $1.5 billion was siphoned off in the name of over-invoicing. It has come down a lot now due to increased import monitoring by the central bank. I think there was a gap in the area of responsibility of bankers to prevent money laundering."

Selim RF Hussain said, "Big businessmen of our country are involved in money laundering. We understood the concept of trade-based money laundering just 2/3 years back. Money laundering has come down a lot in the last one year."

When asked about the reasons behind banks not being able to provide dollars to small and medium traders, Mashrur said, "We have never said the dollar crisis was solved. We are saying that the situation is gradually improving. At present, four LCs are being opened against requests for 10 due to a shortage of the dollar. If you want to open LCs to bring toys, we won't be able to. We are now emphasising on bringing essential commodities including oil and fertiliser. We are now in a much better position than the crisis we were in in May-June last year. If remittances and exports are good, we will come out of this situation."

Asked if banks making profit from selling dollars has worsened the dollar market crisis, Selim RF Hussain said, "This is an old topic. There was once a huge pressure on the dollar market. Then there was an inspection by the Bangladesh Bank. They sat with 10/12 banks, the banks were exonerated. Bank to bank is discussed separately."

Devaluation has never been done in the history of Bangladesh

Regarding the interest rate on the loans, it is said that in the ideal situation there should be market based interest rate. But we have to think how effective or good it is in a developing country like ours. The interest rate cap introduced in 2020 was relevant then. It has been a major factor behind our economic recovery. Whether the cap is relevant after three years is under consideration. The new interest rate that will be determined is also not completely market-based. The new rate will be somewhere between the current rate and the rate we want in the future. The new rate will be imposed by adding 3% to a reference rate, which may be closer to 10%. Currently, the loan rate is 9%. That means, the new interest rate that will be announced is not market-based, but it is a process towards that.

Besides, will inflation decrease if the interest rate is high? When the price of a product increases in our country, it does not decrease ever again. Sugar price is an example of that. So, we have to think whether inflation will decrease after reducing money supply.

Asked how the liquidity situation is at the banks now, Mashrur said the central bank has provided a good liquidity support from the Refinance Scheme. It has withdrawn money from the market by selling dollars, and released Tk2.14 lakh crore in the market in three phases. "We no longer have liquidity stress. No depositor can say that he failed to withdraw money from a bank. Where the liquidity-coverage ratio should be 100%, we kept it at 130%. The market now has excess liquidity of Tk1.35 lakh crore."

Selim RF Hussain said a drop in demand for loans compared to earlier times has also kept the liquidity situation at the banks good.

In reply to a question on Padma Bank and five more Islamic banks receiving the central bank's support and if there was any pressure from the board of directors, Syed Wasek M Ali said the central bank's assistance was taken to deal with the liquidity stress that resulted from withdrawal of deposits in large volumes from our bank. The question was whether the board disturbed me in any way. "If you ask the managing director of a bank if the board disturbs him, will he ever acknowledge it? No board of directors disturb us. If I had been bothered by the board, I would have hesitated to say that. I will not say that the board imposes any decision on us. I will say, we take the board's advice on various matters, and we are allowed to do it."