Bangladesh Bank looks at 'new mechanism' as dollar rates crawl up

"We didn't expect dollar prices to increase this much. It rose to Tk 127-128. Besides, Bangladesh Bank isn't selling dollars," says the managing director of Citizens Bank

As the demand in the import sector jumps ahead of Ramadan and the central bank preparing to boost its reserves, the price of the dollar has gone up.

Although Bangladesh Bank fixed the exchange rate at Tk 120, some private banks bought remittances at Tk 126.50 to Tk 127 on Tuesday. The money changing houses also sold dollars at a raised rate.

In consideration of the overall situation, Bangladesh Bank is pondering launching a 'new mechanism,' said its spokesperson Executive Director Husne Ara Shikha. A circular will be issued in this regard on Thursday, she said.

Demand for imports have surged as Ramadan looms in March. On the other hand, Bangladesh Bank aims to push net reserves up to $15.30 billion at the end of December to meet the condition imposed by the International Monetary Fund (IMF). As such, instead of selling, the central bank is purchasing dollars from the commercial banks. Under the circumstances, inflation, which was already increased in November, may increase further due to a hike in import prices.

"Dollar prices went up mainly because of the increased demand in the import business," said BB spokesperson Shikha.

There are a few reasons behind the exchange rate hike, a senior official at the central bank told bdnews24.com. "Mainly, the banks are increasing imports with the coming of Ramadan. This has pushed up the demand for dollars. However, the remittance and export flow is not enough to match the import demand," he explained.

Moreover, the central bank is purchasing dollars from commercial banks to increase its foreign currency reserves. Hence, many banks are selling dollars to Bangladesh Bank, instead of selling at the interbank level. "The foreign exchange houses are also selling dollars at an increased rate."

Banks purchase dollars from two sources - remitters and exporters, said the treasury head of a private bank.

The dollars bought from the exporters usually cost Tk 119 to Tk 120, while remittances are purchased at a slightly higher price. The authorities open LCs using an average of these two prices.

"Bangladesh Bank usually sells dollars to other banks, which it has halted for now. Instead, it is buying dollars from the banks to increase the reserves. Also, more LCs are opened before Ramadan. Hence, the banks need more dollars," the treasury head added.

"We didn't expect dollar prices to increase this much. It rose to Tk 127-128. Besides, Bangladesh Bank isn't selling dollars," said the managing director of Citizens Bank Mohammad Masum.

Masum said that one of the reasons behind the price hike was the surging demand for opening LCs in the import business. "On the other side, the IMF imposed a condition that the reserves shouldn't drop. Which means that the net reserve level should be maintained."

"If a bank buys remittances at a higher rate, it can't sell dollars at a lower rate. Nobody runs their business for losses. As per the law, you can't face financial loss in a foreign exchange business. This is an offence as per the banking law. Hence, the price is surging as the supply isn't sufficient," said a deputy managing director of a bank on condition of anonymity.

Inflation may rise further in mid-December with the rising exchange rate and hike in import costs. According to the updated information of the Bangladesh Bureau of Statistics (BBS), inflation stood at 11.38 percent in November. The figure was 10.87 percent the month before.

Bangladesh Bank introduced a ‘crawling peg,’ system for the exchange rate in May this year. This resulted in the rate jumping by Tk 7 and reached Tk 117. Then the rate was fixed at Tk 120 using the ‘crawling peg,’ system. Now Bangladesh Bank is looking into new options to address the exchange rate hike.