Assured liquidity support (ALS) from the central bank to commercial banks in Bangladesh faces rollback from December following IMF-recommended freeze on money creation and actions for tightening monetary discipline.
Sources say the Bangladesh Bank (BB) will phase out its ALS facility that feeds funds to banks to help them meet regulatory cash reserve requirements (CRR) in a move seen aligned with the International Monetary Fund (IMF) lending package tied with deep reforms.
Primary dealer banks, which underwrite government treasury bills and bonds, currently access ALS by pledging their securities to the central bank at a rate of 10 per cent.
The banks borrowed Tk 880 billion a month, on average, in six months through August. During the period, banks tapped Tk 5.285 trillion in ALS funds and repaid Tk 5.266 trillion, leaving about Tk 20 billion unsettled on average.
Liquidity shortages in the financial system in recent months forced lenders to rely heavily on the mechanism, according to people familiar with the development told the FE on Tuesday.
In a circular issued Tuesday, the central bank said banks from October will only be able to access ALS against bonds purchased at least two months earlier, narrowing the scope in November to securities bought a month earlier. "From December, the facility will be discontinued altogether."
The special liquidity line was introduced in 2008. But central bank officials say its original purpose has been undermined by the central bank's shift away from so-called 'devolvement' -- a euphemism for the practice of directly subscribing to government securities when market demand fell short of auction targets.
Bangladesh Bank has kept the banks at bay from "devolvement" since 2022. The central bank itself started devolvement in 2023. This is actually tantamount to money printing, thus fuelling inflation.
The banking regulator, however, stopped devolvement in 2024 under conditions tied to its IMF programme, initially approved in 2023 for a US$4.7-billion loan, later expanded to $5.5 billion with an additional support this year.
The Washington-based Fund has pressed for an end to both devolvement and assured liquidity support to strengthen monetary controls.
"Since there is no devolvement, there is no justification for continuing ALS," a senior central banker told The Financial Express, adding that interbank borrowing should now play a larger role in liquidity management.
Some bankers, however, describe the move as an abrupt policy shift.
"It is unexpected for some banks that have come to rely on ALS," says Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank.
He is of the onion that as long as Bangladesh Bank maintains repo operations, liquidity risks should remain manageable.
Economists broadly welcome the decision on liquidation of such liquidity-feeding instrument.
"As banks are no longer involved in devolvement, there is no need for assured liquidity support," says Dr Zahid Hussain, a former lead economist at the World Bank.
"The facility was guaranteed, so its removal is consistent with monetary-policy objectives."
The economist also feels that this is required "to rationalize the liquidity management for Bangladesh Bank end".
Dr M. Masrur Reaz, chairman and CEO of Policy Exchange Bangladesh, thinks the withdrawal could also encourage deposit mobilisation, especially after several banks have struggled to repay depositors.
"It might also help contain inflation, which remains above 8.0 per cent," he says.
He points out that Bangladesh Bank is also purchasing dollars which will indirectly help banks meet their foreign-currency needs, and has plans to merge weaker lenders.
"This is necessary for rationalising liquidity management."
jasimharoon@yahoo.com