A latest regulatory policy prompts a switch towards free float of currencies by redirecting banks to the interbank forex market instead of direct dollar sale to them, for remedying foreign-exchange quandary.
Officials and bankers have said the Bangladesh Bank has made the policy shift to heal the bleeding from the rapidly depleting forex reserves of the country. The pivot is crystal clear from the latest trades in the precious foreign currencies, the American greenback in particular.
Officials concerned at the BB have said the central bank, as part of its forex-protecting strategy, discouraged the import of products deemed not essential. Yet the overall stock of foreign currencies continues falling mainly because of continuous injection of the US dollar by the banking regulator into the banks that remains a matter of concern to the central bankers.
According to the data with the central bank, the banking regulator had sold $12.80 billion and bought $3.38 billion from the banking sector in the past financial year (FY) of 2023-2024. The statistics show the BB, on average, sold more than $1.0 billion a month.
But things see a reversal from the start of this fiscal (FY'25) as the central bank sold $678 million and $170 million in July and August respectively. On the other hand, it bought $105 million and $10 million in the two months.
Seeking anonymity, a BB official says they have decided not to go for continuous selling of the greenback to the banks to help them clear their overseas transactions against LCs.
Instead of directly supplying the dollar requirements, the central bank has assisted the banks in dealing with government LCs through pooling US dollars amounting in-between $50 million and $62 million daily from the interbank sources so that they do not face any trouble in doing their overseas transaction.
"By doing so, we want to make interbank dollar-trading platform vibrate," the official told the FE correspondent.
The new Bangladesh Bank governor, Dr Ahsan H. Mansur, at a recent press briefing said they decided not to sell dollars frequently to the forex-starved banks anymore. He asked the banks to manage their required forex from the interbank market.
Managing Director and CEO of Mutual Trust Bank Limited (MTB) Syed Mahbubur Rahman hails the move as he thinks it will help ensure a competitive forex market here.
"The clients now go to the banks having enough supply of the foreign currencies. Even the government can choose the option of private commercial banks if they have enough dollar stock. It is a good and much-needed move to ensure a healthy competition among the players," he says.
Former lead economist at World Bank's Dhaka office Dr Zahid Hussain says the main principle of the crawling-peg system is to leave the exchange rate to the market slowly without any intervention.
As part of the system, the new governor has expanded the crawling-peg band from 1 per cent to 2.5 per cent.
"It (the forex market following the new strategy of the BB) is where it is supposed to be heading. I think the country is moving towards a market-based system," he notes about the transition to free float of currencies.
The eminent economist deplores that the interbank forex market has been destroyed since early 2022 with too many interventions by the central bank.
Before 2022, the depth of the regular interbank forex market was hovering in-between $300 million and $600 million per day. "Now it is less than $100 million. We're still far below the capacity. We need to incentivize the trades in the market," he says.
The decision on squeezing or stopping dollar sale from the country's foreign-currency reserves is helping improve the stock of foreign currencies as the gross volume of reserves was $21.69 billion by the end of June 2024 in accordance with the IMF's BPM6 arithmetic.
In the following month of July, the reserves declined to $20.39 billion. It rose slightly to stand at 20.55 billion towards the end of August.
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