Forex reserves rebounding slowly, but banks still in dearth

After chronic depletion, the country's foreign exchange reserve started to climb up slowly, thanks to controlled imports that turned the current account balance into a surplus from negative territory.

However, businesses are still suffering from a severe dollar crisis as the Bangladesh Bank has begun to purchase dollars from banks to replenish its reserves which has slowed down business activities.

Amid this situation, the central bank appreciated the taka twice to reverse the expectation of a rising dollar price. The move aims to encourage remitters to send more money home, said central bank sources.

Bangladesh Bank data show that the total inflow of exports and remittances was $4 billion higher than import expenditure during the July-November period of the current fiscal year when this inflow amount was short of $3 billion in the same period of the last fiscal year.

The huge surplus in the inflow of exports and remittances which is considered as primary income for the current account balance was due to a curb in import expenditure.

With the help of higher inflow, the current account balance turned to a $579 million surplus in July-November of the current fiscal year, which was in deficit of $5.6 billion in the same period of the last year.

The current account balance is the difference between current receipts from abroad and current payments abroad. The current account records a nation's transactions with the rest of the world – specifically its net trade in goods and services, its net earnings on cross-border investments, and its net transfer payments.

However, this surplus current account balance could not help to rebuild reserves as this amount is being drained out by a negative financial account which is also known as a capital account.

The negative financial account of nearly $5.3 billion forced Bangladesh Bank to keep selling dollars from foreign exchange reserves to meet import payments despite having a surplus current account balance.

The financial account is one part of a country's balance of payments. It provides a summary of the country's capital expenditure and income – transactions consisting of imports and exports of goods, services, capital, and transfer payments such as foreign aid and remittances. The account measures the changes in national ownership of assets, whereas the current account measures the country's net income.

Huge outflow for private sector foreign loan payments and lower inflow of loans amid higher interest rates in the global market turned the financial account negative.

Talking with the Business Standard, a senior executive of the central bank, wishing not to be named, said that the surplus balance in the current account is being drained out for private sector loan payments. The central bank has been selling dollars from reserves for import payments.

Short-term loan inflow was negative, more than $1 billion, in July-November of the current fiscal year which means the country paid higher than it received, central bank balance of payment data shows.

In this situation, the central bank sold a record $6.7 billion to banks in the six months (July-December) of the financial year 2023-24. However, the dollar sales were lower than in the same period of last year, around $7.8 billion, due to controlled imports.

When it kept selling dollars from reserves, it also bought dollars from some banks in a bid to rebuild reserves as per the International Monetary Fund (IMF) ceiling set for December.

Reserve boosted with dollar purchased from Islamic banks

At the end of December, the gross reserve improved to $21.7 billion from $20.78 billion in November when the net reserve was close to the IMF set ceiling of $17.78 billion set for December.

The reserve rebuilding was due to buying dollars from some Islamic banks, central bank sources said.

A senior executive of a central bank told the Business Standard that pressure on the forex market eased basically for two reasons – controlled imports and high depreciation.

Moreover, the inflow of remittance increased after the central bank appreciated the taka cutting down the official dollar rate despite the ongoing crisis. The move was to reverse the market expectation that the price of the greenback will rise further, he said.

Md Habibur Rahman, the chief economist of the Bangladesh Bank, said that the governor's decision not to go for the free float dollar rate mechanism also worked well as there was an expectation that the dollar rate would go up further if the central bank went for a market-driven mechanism. Now, remitters have been sending dollars more as the expectation of a dollar price hike has reversed.

However, the forex market is still under pressure, he said.

The Bangladesh Bank expects that dollar pressure will ease in the next few months as the Federal Reserve Bank of America is likely to go for an interest rate cut amid easing inflation, which will help to increase the inflow of funds in emerging economies, the central bank's chief economist added. 

Zahid Hussain, the former lead economist of the World Bank's Dhaka office, said the central bank turned the current account into a surplus just by controlling imports which cannot be the only way. In doing so, it stagnated business activities and now the country needs dollar liquidity to keep the economy going.

Stagnant business expansion 

Bangladesh Bank data shows that capital machinery imports in July-November of the current fiscal year declined by 36% year-on-year while industrial raw materials imports declined by 34%, which reflects stagnancy in business expansion.

Private sector credit growth remained sluggish for the last six months hovering between 9% and 10% which is also evidence of a stall in business activities.

Sharing business experience in Bangladesh, Massih Niazi, CEO of Petromax LPG, told TBS that a Dutch family based in Amsterdam entered Bangladesh a year back through the acquisition of Petromax as they see a lot of development in the LPG sector for the future linked with the growth of the country's economy. 

They planned to acquire two or three companies but have put on hold further investment after acquiring Petromax. They are following a wait-and-see policy amid dollar shortage and continuous fall in reserves, he said.

"We are struggling to open LCs every day amid dollar shortage. Faster devaluation causes huge losses for companies but we are not seeing any real measure from the government to tackle the devaluation," Massih Niazi said.

"The Bangladesh Bank is trying to keep the rate at Tk110 but we can not find dollars in the market at this rate," he added.

Why BB buys dollars from Islamic banks 

A central bank executive told TBS that there are two reasons behind buying dollars from Islamic banks. First, the Bangladesh Bank is bent on rebuilding reserves as per the IMF ceiling. Second, some Islamic banks are short in maintaining a regulatory cash reserve ratio with the Bangladesh Bank due to a serious liquidity crisis amid deposit withdrawal caused by alleged loan corruption. 

The official said that the Bangladesh Bank has been providing liquidity support even for clearing interbank cheques as some Islamic banks could not maintain the required cash in their account to settle bank-to-bank transactions.

On 28 December, the Bangladesh Bank lent Tk22,000 crore to seven banks, five of which were Islamic banks, facing liquidity crisis to help them show healthy balance sheets at the end of the year.

Remittance inflow is still higher through Islamic banks. So, the central bank has been buying dollars from them to meet their shortfall of local liquidity.

The central bank bought $1.04 billion from the banks in the six months of FY24, around 80% of which was from the Islamic banks.

Dollar sales to BB hurt Islamic banks' business

The sale of dollars to central banks hurt the external business of Islamic banks as exports and imports drastically declined in those banks. Many exporters and importers have been switching their businesses from Islamic banks due to not getting dollars for opening LCs.

According to data from the Bangladesh Bank, exports facilitated by the 10 full-fledged Islamic banks saw a sharp decline of almost 39% in the July-September quarter of FY24 compared to a 9.26% decrease in the preceding quarter.

Meanwhile, the nation's overall exports demonstrated a contrasting trend, registering a growth of nearly 7% during the same quarter, as indicated by data from the Export Promotion Bureau.

Moreover, the country's total imports decreased by 25% during July–September, while imports through Islamic banks declined by 47%.