How Bangladesh Bank's measures to check the dollar crisis backfired 

It was the Bangladesh Bank that once asked banks to strictly follow exchange rates set by a bankers' platform and endorsed by the central bank.

Bankers who traded dollars above the rate were even fined.

Now the central bank has sought to cancel the penalty. Banks now can set their own rates for dollars.

But bankers cannot rest assured as the central bank's new instruction came verbally, there has not been any official circular issued so far allowing them to go for higher-than-prescribed rates for dollars. 

The central bank spokesperson denied having any idea of "verbal instruction" for exchange rates.

This is just one instance of how the central bank abruptly changes crucial decisions that put bankers at a loss about what to do and what not to.  

The central bank suspended some bank treasury officials in August last year, a stern step followed by a steep fall in remittance inflow in the following months. Inward remittance see-sawed throughout last year  before sliding to its lowest in 41-months in September.    

Key measures failed

All the key measures the Bangladesh Bank had taken in the last one year to stabilise the forex market, including multiple exchange rate mechanisms, punishing banks for selling dollars at higher prices, and new price mechanism for forward trading, have backfired as they neither could contain inflation or stabilise the eroding foreign exchange reserves. 

Predictably, all the measures diverted remittance to informal channels, further worsening the dollar crisis and reserve erosion. 

The bank's changing decisions frequently created confusion among bankers which eventually caused chaos over dollar rates in the forex market. 

In June, Bangladesh Bank announced that a unified exchange rate would be introduced from July ending the multiple exchange rate regime. In less than four months, the central bank has now changed its stance and chosen to not go for a free float exchange rate before national elections due in December or January. 

Governor backtracks

In a recent meeting with bankers, governor Abdur Rouf Talukder said the implementation of market based exchange rate will be delayed as it may create further inflation pressure, insiders said. 

Unified exchange rate was introduced with the aim of easing pressure on forex reserves, but it has not yielded the desired results due to delay in implementation.

To meet banks' import demands, the central bank kept on selling dollars from the forex reserves, shedding $13 billion- more than a billion dollars every month-- in the last fiscal year, and another $3.7b in the first quarter of this fiscal.

The delay in implementing a fixed exchange rate will prolong the forex woes for the country, the IMF review team said during their meeting with bankers in Dhaka this month. 

The lender also pointed out the latest policy rate hike-- straight by 75 basis points to 7.25%-- was a delayed step, which will take at least six months to impact the stubborn inflation close to 10%, said a banker who attended the meeting. 

Bankers wary of BB's actions

On 28 September, Bangladesh Bank fined treasury heads of 10 banks Tk1 lakh each for selling dollars at a higher price than the "official" rate set by Bangladesh Foreign Exchange Dealers Association (BAFEDA).

Shortly afterwards, the monthly remittance figure showed the remittance inflow through the banking channel in September slipped to a 41-month low of $1.3 billion. The steep decline was attributed to hundi transactions that attract expatriates to informal channels offering higher rates. 

Being sceptical about its own actions on the flow of remittance, the central bank soon backtracked on its earlier decision of penalising banks for selling dollars at higher-than-set rates, finding such actions would have rather backfired and diverted more remittance to informal channels. 

This was not the first time the central bank took punitive measures only to revoke those shortly.

In August last year, it removed the treasury heads of six banks for making higher profits in trading dollars. It was the month that recorded a decline in remittance flow.

However, all of them were reinstated as no violation of rules could be established against them in trading dollars. 

Between the two instances, the country was deprived of its usual flow of inward remittance, with monthly flow remaining below $2 billion for six consecutive months before dipping to a little over $1 billion last month, despite record high manpower export.

The reserves continued to erode fast, taking its toll on the  balance of payment widening deficit in the financial account and current account balance.

The proposal of waiving the latest action – financial penalty on 10 bankers – will be placed in the board meeting of Bangladesh Bank, possibly on 22 October, according to Bangladesh Bank sources. 

Meanwhile, the central bank is "verbally" instructing banks to sell or buy dollars at above the official rate to increase remittance inflow through the banking channel, said a senior official of the Bangladesh Bank wishing not to be named. 

No official order has been issued in this regard so far. 

Bangladesh Bank's Executive Director and spokesperson Md Mezbaul Haque said he is not aware of such verbal instruction. He said the "official" rate is still applicable for remittance. 

Many banks have already started to offer higher rates for remittance, up to Tk115 a dollar when the official rate is Tk 110.50.  

The so-called verbal instruction and official denial took experts and bankers by surprise, who found the central bank measures to be wrong, which backfired and deprived the country from dollar earnings. 

Bangladesh Bank's insistence on keeping dollar rate low actually incentivised money launderers to buy dollars from remitters through informal channels, they said. 

"Bangladesh Bank has been taking decisions which promote irregularities," said Dr Ahsan H Mansur, executive director of Policy Research Institute.

He said the central bank is giving signals to banks to take remittance at a higher rate now but they are not making it formalised. 

Frequent changes in decisions and issuing verbal instructions are not healthy practices and these would erode confidence in the financial market, the economist warned. 

Since there is no formal instruction, Bangladesh Bank can launch further crackdown anytime on bankers for not following the "official" rate, he added, terming such practices damaging for institutional governance of a regulatory body. 

"There is no consistency in what they are saying and what they are doing," he added. 

Raising questions over Bangladesh Foreign Exchange Dealer Association (BAFEDA)'s role in the market, the economist, who had a long career with the IMF, said the regulator should not allow a private platform like this to set exchange rate.

In September last year, the Bangladesh Bank instructed BAFEDA to set different rates for exports, imports, and remittances to control the rapid increase in dollar prices after introducing a multiple exchange rate regime. 

However, in June this year, Bangladesh Bank announced to end the rate regime and moved to implement a unified exchange rate. 

When talking with the Business Standard on the condition of anonymity, different bankers said the dollar rate for remittance is fixed by BAFEDA which is not a regulator. Banks are not bound to follow their rates but the Bangladesh Bank verbally instructed banks to follow the BAFEDA rates. 

Moreover, BAFEDA is run by managing directors of commercial banks. If the rate is violated by treasuries, that is also the failure of the banks' managing directors. Instead, treasury heads were penalised, they said.

After the central bank's announcement to introduce a unified exchange rate from July, BAFEDA's rate became invalid. However, Bangladesh Bank is still penalising for not maintaining BAFEDA rate which is a contradictory measure, bankers said. 

What is behind such policy measures? 

The role of BAFEDA in the exchange market also came up in the discussion with the IMF team.

The visiting team also questioned Bangladesh Bank about the existing exchange rate mechanism and how the dollar rate is set by association of banks. 

A top official who attended the meeting said the IMF team asked how BAFEDA set the dollar rate and where they get the data for setting the dollar price. 

They also asked if BAFEDA can independently fix the rate, he said. However, the Bangladesh Bank team could not answer satisfactorily. 

One deputy governor who was in-charge of all foreign exchange relevant departments in Bangladesh Bank was blamed for such serial policy failure in stabilising the forex market. He was removed from those departments later except the foreign exchange policy department. 

The latest action against the treasury heads of the 10 banks also caused huge criticism as that was taken from the department of foreign exchange policy which was under the same deputy governor. 

Policy mismatch does not end here!   

When the fixed exchange rate was blamed for reserve erosion and dollar crisis, the foreign exchange policy department came up with another fixed rate mechanism for forward foreign currency selling and buying which turned out to be another disaster for the market. 

On 24th September, the foreign exchange policy department of Bangladesh Bank issued a circular fixing the rate of forward dollar by adding the maximum six months moving average rate of treasury bill (SMART) + 5% per year to the current dollar rate. As per the new mechanism, banks can charge a maximum nearly Tk 114 per dollar for forward selling and buying when the currently official rate is Tk 110.50 while the actual market rate is above Tk 115.

The circular mentioned that banks can go for forward trading for a maximum of one year.

The day after issuance, Bangladesh Bank revised the circular setting the maximum tenure of three months which reflects that decision was taken without proper analysis. 

The backstory of introducing a new price mechanism is the Bangladesh Bank found that banks were offering importers a higher rate than market rate in the name of forward selling. As banks could not sell the dollar at the BAFEDA set rate, they show the higher rate as forward selling as importers have to settle the payment six months after importing goods. On this ground, the Bangladesh Bank set the maximum rate and tenure for forward selling dollars. 

Now the new price mechanism puts multinational companies and banks in trouble as the tenure for deferred payments are six months to one year. Moreover, multinational companies import raw materials six months before selling the products. So they go for hedging to adjust the future cost with their products. But in the new mechanism, multinationals are not getting the risk management support, said a treasury head of a private commercial bank. 

He said banks are now under tremendous pressure from multinational clients as they are not getting risk management support for their business. If this situation continues, they will stop their business operations and that would drive away foreign investors, he added.