Reserves reach $21.3b with strong remittances, currency swaps

The country's gross foreign exchange reserves have increased by $727 million in five days, reaching $21.3 billion on Monday, bolstered by robust inward remittances and currency swaps with banks, as stated by central bank officials.

According to data from the Bangladesh Bank, gross reserves stood at $20.57 billion as per BPM-6 on 28 February. The data also showed that the money market swapped currency equivalent to $100 million on Monday (4 March).

A senior official at the central bank pointed out that more than $2 billion in remittances arrived in February, which could contribute significantly to the increase in gross reserves. Additionally, ongoing currency swaps with banks are a continuous process, further contributing to the rise in reserves.

Experts say there is no balance between where the reserve money comes from and where it is spent, resulting in difficulties in maintaining reserves. While the trade deficit has narrowed slightly due to measures by the Bangladesh Bank to control imports, there are concerns about the sustainability of this approach.

The central bank has provided commercial banks with currency swap facilities since 15 February this year, which measure has since started contributing to the reserves.

The currency swap enabled the Bangladesh Bank to shore up its gross reserves as banks have been exchanging dollars from their nostro accounts (accounts held by domestic banks in foreign countries).

The influx of dollars via the currency swap will not contribute to the replenishment of net reserves, as these represent short-term obligations. Net reserves are determined by deducting short-term liabilities from gross reserves.

The Bangladesh Bank provided over Tk6,500 crore till the end of February to banks within a mere three-day period, in exchange for nearly $600 million, addressing their liquidity challenges.

The banks swiftly turned to the central bank to access funds at a favourable 2.7% interest rate, significantly lower than the 8% borrowing rate, through a repurchase agreement, also known as a repo.

Experts, however, said supplying easy money to banks conflicts with the central bank's latest monetary policy, aimed at tightening the money supply to control inflation.

In the latest monetary policy for the second half of fiscal 2023-24, the central bank increased the key policy rate, also known as the repo rate, by 25 basis points to 8%, effectively making money more expensive for banks.

The repo rate was hiked amid a severe liquidity crunch among banks and soaring money rates, aiming to alleviate still-elevated high inflation, which reached 9.86% in January of this year from 9.41% in December.

As per the currency swap guideline, the interbank reference rate, currently set at Tk110 per dollar, will be regarded as the spot rate.

While repatriating their dollars, banks will be subject to an interest rate that is lower than the repo rate. In this scenario, the interest rate will be determined by the variance between the three-month average SOFR for the dollar and the repo rate for the taka, as outlined in the central bank guidelines.

For instance, at present, the Secured Overnight Financing Rate (SOFR) rate is 5.3% and the repo rate is 8%. The difference is 2.7%, which will be charged annually to banks for the swap.

Banks will reclaim their dollars at a nearly identical rate to the one at which they initially exchanged them with the central bank. Every transaction necessitates a minimum value of $5 million and its corresponding amount in taka, with a duration ranging from 7 to 90 days.