All banks have to sell dollars at same rate

• ABB and BAFEDA will set dollar rate every day and take verbal consent from central bank
• The new system effective from Sunday
• Exchange rate for remittances will be the same for all banks
• Exporters must enchash their earnings from their dealer banks

All banks from now on have to sell dollars at a similar rate for international trade, a meeting of the Bangladesh Bank with bankers and foreign exchange dealers yesterday decided to help ease the existing volatility in the forex market.

The tripartite meeting also decided that the Bangladesh Foreign Exchange Dealers Association (BAFEDA) and the Association of Bankers, Bangladesh (ABB) will set the exchange rate every day and take verbal consent from the central bank, said meeting sources.

The new system will come into effect from Sunday.

Also, the central bank assured bankers of further devaluation of taka to reduce the gap between the LC rate and the open market rate of US dollar. Bankers have been asked to send proposals to the central bank stating how much devaluation they want.

Currently, many banks sell dollars to businesses at higher rates for opening letters of credit despite purchasing greenbacks at lower rates from the central bank.

Banks have been settling import payments at Tk95-Tk97 per dollar, on the pretext of dollar shortage whereas the official LC rate is Tk87.90. However, in case of export settlements, exporters are being offered the official rate against their dollar earnings. This is how some banks are making business from the price difference of import and export rates when consumers are bearing the cost of import-led inflation.

The fixed lending rate also created imbalance in pricing, prompting banks to become involved in undue business amid dollar crisis as they could not raise the loan rate balancing with the rising loan demand, say industry insiders.

Yesterday's meeting also decided that the exchange rate for remittances will be the same for all banks. So, no bank will be able to buy dollars sent by expatriates at a higher rate.

After the meeting, Bangladesh Bank spokesperson Serajul Islam told reporters that the central bank will continue to provide liquidity support as required. And, exporters must enchash their earnings from their dealer banks, which will help bring stability to the forex market.

Seeking anonymity, the managing director of a private bank, who was present at the meeting, told TBS, "Interbank exchange rate was also discussed at the meeting. The ABB and the BAFEDA have said the current exchange rate set by the Bangladesh Bank is not reasonable."

The central bank has sought a proposal in this regard and has assured of taking it into consideration in determining the exchange rate, he said.

Welcoming the central bank's decision to set a uniform dollar-taka exchange rate, Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association, said it should have been done much earlier.

"Till now banks have sold dollars at different rates, causing problems for us. We have requested the Bangladesh Bank and the finance ministry many times to fix a similar rate for banks," he noted.

Selim RF Hussain, managing director and chief executive officer of Brac Bank Limited, told TBS, "A number of steps have been finalised in the meeting to ensure more transparency and discipline in the exchange market. There are some temporary challenges for the time being, which will go away gradually."

Salehuddin Ahmed, former governor of the Bangladesh Bank, said the dollar exchange rate is determined on the basis of market demand and supply.

He said there was a fixed exchange rate in the country before 2003, and a uniform rate for all banks is a temporary measure to curb currency volatility.

The economist said if the uniform exchange rate is fixed, it should be done for both buying and selling. Besides, there should be a spread limit for buying and selling dollars.

Asked if the uniform rate will have any effect on exports and imports, Salehuddin said, "I do not think there will be much effect. Maybe a little higher rate will be fixed, which will give some benefits to exporters, and imports may fall a bit."

The former governor does not think the uniform rate will ease the dollar market volatility in the long run. Myanmar has a fixed official exchange rate and they do not keep track of what is happening in the kerb market, he noted.

"In an expanded economy like Bangladesh's, how long can the exchange rate be artificially fixed?" he said.

The bottom line is that banks and money exchangers should follow the uniform rate. Now, it remains to be seen what effect this decision will have on the market and inflation, he said.

On Thursday, a dollar traded for Tk97.50 in the kerb market, down from Tk98.50 a day ago, while the interbank exchange rate was static at Tk87.90.

On the other hand, the dollar was trading in Pakistan at Rs202.40 around 1:30pm after appreciating against Wednesday's close of Rs201.90, according to the Forex Association of Pakistan. In the open market, the greenback was trading at Rs203.50.

According to the Economic Times, the dollar traded at Rs77.53 in India. The exchange rate was Rs76.43 at the beginning of this month. In the span of 26 days, India's rupee has lost its value by around Rs1.

Forex reserves under pressure

As demand for the dollar rose due to increased imports, the central bank started selling dollars, releasing $5.80 billion to banks till 24 May. In FY21, the central bank purchased around $8 billion from banks.

In the meantime, forex reserves are facing pressure because of a rise in imports in post-pandemic times and their higher payments caused by rising product prices in the international market.

The country's reserves, which reached $48 billion in August last year, dropped to $42.29 billion on 25 May.

In July-March of FY22, exports registered about 33% growth, but it could not hold back the trade balance that slid into a deficit of about $25 billion, which was 9% higher than that of the whole previous fiscal year.

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