Can inflation be tamed as dollar price keeps rising?
On Thursday, banks were forced to pay a staggering Tk127.70 per dollar for remittances. In the last week of November, remittance dollars were bought at Tk122.20-122.50, meaning the dollar price rose by Tk5 or 4.25% in December
Despite a reduction in monthly import expenditures from $7-8 billion to $5-6 billion, the dollar market remains imbalanced. Banks are fiercely competing to acquire dollars to meet import needs, driving the dollar-taka exchange rate to a record high last week.
On Thursday, banks were forced to pay a staggering Tk127.70 per dollar for remittances. In the last week of November, remittance dollars were bought at Tk122.20-122.50, meaning the dollar price rose by Tk5 or 4.25% in December.
After about four months of stability, the dollar market has experienced renewed volatility since early December. The current rates have raised concerns at the central bank, as domestic prices remain high despite global commodity price declines, largely due to exchange rate fluctuations. This could complicate efforts to control inflation.
Sources from banks indicate that the central bank's decision to stop selling dollars from its reserves and start purchasing from commercial banks to maintain reserves, as required by the IMF, has worsened the dollar shortage situation. Additionally, the December import payment deadline and the influence of aggregator exchange houses in setting dollar prices have contributed to the rising rates.
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The country head of a leading exchange house told The Business Standard, "Banks are under pressure to meet payment demands. Previously, when we quoted a price for selling dollars, the banks would negotiate. Now, the situation has reversed, and banks are accepting the prices we set."
The sudden spike in the exchange rate caught Bangladesh Bank Governor Ahsan H Mansur off guard. He attributed the surge to the immaturity and lack of market literacy among some forex market players.
"A bank buys remittance dollars at a rate of Tk123 in the morning, and later the same day, it buys the dollar at Tk127. How can there be a Tk4-5 difference in one day? It is pure whimsy," he told TBS.
"Banks are buying dollars from exporters at Tk118-119 and from remitters at Tk127. This is unethical. Such a significant price difference for different types of sellers is unacceptable," he said, emphasising that foreign currency dealers in banks must be more cautious.
"Bank authorities need to monitor this," he said, pointing out that some state-owned banks are exploiting the open dollar market.
Regarding his approach to not controlling the dollar market as before, the governor said, "I do not want to call banks and dictate dollar rates like before. However, banks must operate within a set framework of rules and regulations. There should not be a Tk5-7 difference within the same market."
How the dollar began to rise
Senior bank officials said that the interim government, which assumed power after the fall of the Awami League government on 5 August, has implemented several measures to stabilise the dollar market. One key initiative, introduced on 18 August, was increasing the existing band for inter-bank foreign exchange transactions from 1% to 2.5% to enhance market liquidity. Under the current crawling peg system, the mid-rate stands at Tk117.
"This means banks can add 2.5%, allowing the rate to rise to Tk120. From that point, banks have had the flexibility to offer slightly higher rates," said the managing director of a private commercial bank, on condition of anonymity.
In a meeting the day after the band increase, Governor Ahsan H Mansur urged state-owned banks to take immediate steps to clear nearly $2 billion in overdue payments to foreign banks. He also called on private banks to sell dollars in the interbank market to facilitate these payments and announced that no dollar support would be provided from the reserve.
"Following this, private banks sold some dollars, but the high payment obligations forced state-owned banks to prioritise collecting remittance dollars to meet their needs. As a result, they began offering rates slightly higher than the fixed rate to exchange houses. Some private banks followed suit," said the deputy managing director of another bank.
By the third week of September, most banks were offering higher rates to exchange houses, causing the dollar price to fluctuate between Tk121 and Tk122.50, he added.
Will the rate drop?
When asked if the dollar price could decrease, a senior banker said, "For the dollar price to drop, the central bank must enhance monitoring. The aggressive rates at which state-owned and some private banks are buying remittance dollars need to be curbed."
He added, "Banks must adhere to the rates agreed upon by the treasury heads of state-owned and private banks. Without this compliance, I do not see the rate stabilising anytime soon."
Bangladesh Bank Governor Ahsan H Mansur, however, expressed optimism about the dollar market stabilising. Speaking to TBS last Thursday, he said, "The market's instability is due to immature decisions by a few banks. There is no real need to purchase remittance dollars at high rates. We are monitoring the situation closely and do not see a significant supply shortage or demand surge. I believe we can resolve this soon."
The governor further noted, "Banks claim they paid higher rates to open government import LCs. If they had informed us, we could have facilitated it or transferred the requirement to another bank. There is no justification for destabilising the market over this."
Why dollar rate matters in taming inflation
A report by Bangladesh Bank titled "Inflation Dynamics in Bangladesh, July-September 2024" highlighted that the impact of import-dependent items on inflation decreased from 39% in June to 26% in September. While this brought some relief, it was not enough to counter the rise in food and service prices.
Moinul Islam, a former economics professor at Chittagong University, explained, "As an import-dependent country, the exchange rate significantly influences our inflation. The recent increase in the dollar rate is alarming for the economy."
"When the exchange rate rises, it has an immediate ripple effect. Regardless of measures like increasing the policy rate or reducing the money supply, inflation cannot be controlled effectively without stabilising the exchange rate. If the dollar rate doesn't drop soon, the central bank will struggle to meet its inflation targets," he said.
On how the central bank can manage the dollar rate, Moinul said, "While it's prudent that the central bank has stopped selling dollars from reserves, it must take stronger steps to curb money laundering through over-invoicing and under-invoicing."
