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Costly imports, low remittance mount pressure

Taka depreciates deeper

Local currency loses 80 paisa against dollar in a single day

Siddique Islam | May 17, 2022 00:00:00

Bangladesh taka's value dropped deeper in exchange with the US dollar amid higher demand for the greenback against lower receipts through trade and remittance, sources say.

Higher payment obligation for costly imports in the wake of global price rises and supply constraints is cited as the immediate reason for the BDT depreciation.

The local currency lost its value by 80 paisa on the inter-bank foreign- exchange (forex) market on Monday in such a fall after over a week, market operators told the FE.

The US currency was quoted at Tk 87.50 each on the day against Tk 86.70 on the previous working day. It was Tk 86.45 on May 08.

In the meantime, they add, the taka has shed its value by nearly 2.0 per cent or Tk 1.70 since January 2022 on the same grounds. The dollar was traded at Tk 85.80 on January 08 this calendar year.

The exchange rate of the local currency also depreciated similarly against the greenback at customer level for settling import payments.

The US dollar was quoted at maximum of Tk 87.60 each for the sale of bills for collection, generally known as BC, on the day against Tk 86.75 of the previous level.

Some banks, however, traded the US currency at more than Tk 95 in the name of 'corporate deal' to settle import-payment obligations of their customers, according to the operators.

They also say cash dollar also traded at Tk 96 on the open market, commonly known as kerb market, on the day.

On the other hand, the banks quoted dollar at Tk 86.60 on the day against Tk 85.75 on the previous working day to remitters for telegraphic transfer (TT) of their funds.

"The local currency depreciated against the US dollar in line with the market requirement," Md Serajul Islam, Bangladesh Bank's spokesperson, told the FE.

Mr Islam, also an executive director of the central bank, says such depreciation will, conversely, help enhance export earnings as well as the flow of inward remittances.

"Actually, we want to increase the inflow of foreign exchange through increasing export earnings alongside inflow of remittances," the spokesperson explains the financial paradox.

He also says the central bank has already imposed (higher) margin on letter of credit (LC) for all non-essential item to ease import-payment pressure on the economy.

Earlier on May 11, the BB tightened the LC rules, doubling the margin for all imports, save some essentials, on the same grounds.

Under the latest move, the central bank imposed a prohibitive 50-percent cash LC margin at the minimum on all non-essential items instead of 25 per cent.

Besides, such LC margin for high-end motor vehicles like SUV and Sedan cars along with electrical and electronic products which are being used as home appliances has been jacked up to minimum 75 per cent from 25 per cent.

Talking to the FE, another BB official says the demand for the US dollar increased recently mainly due to higher prices of essential items, including fuel oils, on the global market following the ongoing Russia-Ukraine war in the major global supply belt.

"We're providing the foreign-currency liquidity support to the banks continuously on a priority basis to settle their import-payment obligations," the central banker notes.

As part of the remedial move, the BB sold $108 million directly to three state-owned commercial banks (SoCBs) on Monday.

The central bank provided the liquidity support to the public banks for settling import payments for petroleum products and fertilizers, according to the BB officials.

The central bank has so far sold more than $5.0 billion from the reserves directly to the commercial banks as liquidity support for settling their import-payment obligations in the current fiscal year (FY), 2021-22.

Bangladesh's foreign-exchange reserves came down to $41.91 billion on Monday from $41.93 billion of the previous working day, according to official figures.

The reserves fell to $41.95 billion on May 11 after the payment worth $2.24 billion to the Asian Clearing Union (ACU) against the imports of March-April period of 2022 from $44.11 billion of the previous working day.

Bangladesh's reserves have been maintaining a falling trend in recent months following higher import payments alongside lower flow of inward remittances.

The BDT's latest depreciation came against the backdrop of higher outflow of foreign exchange following 'hefty growth' import payments compared to the inflow in the last few months, the operators and economists observe.

They, however, say gradual depreciation of the local currency against the US dollar is a right strategy for developing countries like Bangladesh.

"It's a prudent strategy for Bangladesh so that economy and market gradually adjust to small shocks," Mustafa K Mujeri, executive director of the Institute for Inclusive Finance and Development (InM), tells the FE while replying to a query.

Mr Mujeri, also a former chief economist of the BB, says the demand for the dollar increased following a larger mismatch between inflow and outflow of the foreign exchange in recent months.

"It's a bigger depreciation of the local currency in a single day against the US dollar after introducing the floating exchange rate in Bangladesh in May 2003," the treasury head of a leading private commercial bank (PCB) tells the FE.

Floating exchange rate is a regime where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies.

Bangladesh adopted a floating exchange-rate regime in May 2003 as part of a comprehensive medium-term economic programme to promote growth and alleviate poverty.

The private banker also says depreciation of the local currency will help boost export earnings as well as remittance inflow.

"But imports will be costlier in the near future following such depreciation of the BDT against the greenback," he says about the downside risk, adding that it may fuel inflationary pressure further on the economy.

Meanwhile, the settlement of letters of credit (LCs), generally known as actual import, in terms of value, rose by nearly 50 per cent to $60.57 billion during the July-March period of FY 22, from $40.48 billion in the same period of the previous fiscal.

On the other hand, the opening of LCs, generally known as import orders, grew by more than 46 per cent to $68.36 billion during the period from $46.81 billion in the same period of FY 21.

The operators, however, say lower remittance inflow also pushed up pressure on the country's foreign-exchange coffers recently.

The flow of inward remittances dropped more than 16 per cent to $17.31 billion during the July-April period of the FY '22 from $20.66 billion in the same period of the previous fiscal.

In the wake of such developments on the money market, the central bank has asked all the authorized dealer (AD) banks to retain inward remittances in foreign currency against service delivery abroad.

Officials say the banks have been asked to intimate individual beneficiaries of inward remittances regarding the option for retention in foreign currency.

"Without their consent, banks should not outright encash inward remittances for credit in Taka accounts," the Bangladesh Bank (BB) said in circular issued Monday.

Currently, 70 per cent of inward remittances against ICT services can be retained in foreign-currency accounts known as Exporter's Retention Quota (ERQ) Accounts while 60 per cent against other services.

According to the circular, banks need to guide their customers on facilities of outward remittances out of retention amount for bonafide current-account transactions.

"It will remit payments abroad out of retention account without seeking permission of the central bank," a senior official of the Bangladesh Bank (BB) tells the FE.

Actually, individual service-income recipients can meet their foreign payments beyond indicative limits without approval from the BB if the fund is retained in foreign currency, the central banker explains.

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