Bangladesh Bank explains causes of dollar market volatility

The central bank cites increased foreign currency demand, IMF targets, and other factors

Bangladesh Bank has clarified the recent dollar market instability, citing increased foreign currency demand in December due to pressure from settling letters of credit, or LC, payments.

The central bank’s spokesperson Husne Ara Shikha told journalists on Monday that some banks are being held responsible for the volatility in the dollar exchange rate.

She added that Bangladesh Bank has instructed these banks not to collect remittances at rates above Tk 123.

In its written explanation, the central bank said it recently stopped selling dollars to meet International Monetary Fund, or IMF, targets, a move that has failed to boost the dollar supply in the interbank market.

It also said banks were instructed to make timely payments on foreign debts before the end of December.

The central bank's explanation also pointed out that the monopolistic and middlemen roles of remittance aggregators had contributed to the instability in the exchange rate.

In addition, a mismatch in the inflow and outflow of foreign exchange at commercial banks has been another factor in the volatility of the dollar market.

Due to Bangladesh's credit rating downgrade, correspondent relationships between local and foreign banks have been disrupted.

This has led to difficulties in opening UPAS (Usance Payable at Sight) LCs, deferring payment maturities, and hindered the flow of offshore banking loans.

Earlier this month, the dollar market again became unstable, pushing the remittance exchange rate to Tk 128.

Bangladesh Bank also sought an explanation from 13 banks for purchasing dollars from foreign exchange houses at higher rates.

A meeting was later held with the treasury heads of these banks, where Deputy Governor Zakir Hossain Chowdhury instructed them not to accept remittances above Tk 123.

SAME DOLLAR RATE FOR REMITTANCE, EXPORT

Governor Ahsan H Mansur ordered all banks to offer the same dollar exchange rate for remittances and export earnings.

In addition, a maximum spread of Tk 1 is set for dollar transactions.

The directive was announced during the meeting, and multiple bankers who attended confirmed receiving the instructions.

The governor also warned that non-compliant banks would face a fine of Tk 1 million.

Bangladesh Bank spokesperson confirmed the meeting but claimed to be “unaware” of the directive.

A treasury head from a private bank attending the meeting said an official notification would soon be issued, with Bangladesh Bank overseeing its enforcement.

“The governor instructed that the dollar rate for remittances and exports must be uniform. Earlier, banks offered higher rates for remittances compared to exports. This practice will no longer be allowed,” the official said.

Another treasury head said Bangladesh Bank had not specified the exact dollar rate for remittances or exports.

In May, the central bank introduced the "crawling peg" exchange rate system, which led to an increase of Tk 7 in the dollar rate, bringing it to Tk 117.

Later, it unofficially capped the rate at Tk 120.

While the market remained stable for several months, the dollar rate recently surged to Tk 128, disrupting market stability again.