Liquidity crisis in banks eases with dollar inflow

The recent inflow of US Dollars (USD) through healthy remittance and export earnings has brought back stability in the foreign exchange market, easing the long persisting liquidity crisis in banks since the last year.

The Bangladesh Bank has been getting a smaller amount USD purchasing requirements from the state-owned banks. As USD flows into state-run banks through export earnings, they no longer need to buy foreign currency from the Bangladesh Bank to resolve larger imports. 

This in turn has allowed the banks to hold on to their local currency reserve and improve their liquidity. They are also not needing to borrow from other local banks to purchase USD, which is reflected by the stable call money rate.

The USD reserve in banks crossed $1 billion in June this year, which had dropped to below $400 million in April. Meanwhile, the call money rate remained stable at 4.5 percent for the last two months, according to the central bank.

Bangladesh Bank collected Tk 13,941 crore from the market in May by selling USD to banks, which was 30 percent lower than April. In June, the Bangladesh Bank sold USD worth Tk 1,690 crore so far, and expects that it will not have to sell USD much this month due to adequate reserve in banks.

Though the money market calmed down, it has had no impact on lending rates as yet. 

Most banks are still lending at 10 percent plus rate. However, the weighted average lending rate, which was moving upward in March under liquidity pressure, backtracked in April, declining slightly to 9.46 percent from 9.5 percent in May.

The improved position of USD reserve has kept the inter-bank exchange rate stable and reduced the USD price gap in the curb market with the bank rates. Curb trading occurs outside of general market operations, commonly through computers or telephones after the official exchanges have closed.

The inter-bank exchange rate remained stable at Tk 84.50 since May, when the USD rate stood at Tk 84.70 in the curb market. The gap of exchange rate between banks and curb market narrowed to Tk 0.2 in June, when it was above Tk 0.50 several months earlier.

The relatively better dollar reserve of banks also gave comfort to the Bangladesh Bank, allowing it to better manage trade balance by narrowing the trade deficit. The deficit narrowed by 10.43 percent in first 10 months of current fiscal year compared to the same period of the last year.

It has significantly helped reduce the pressure on macroeconomy.

“In May, import saw a sharp drop in year-on-year growth by 15.40 percent when export rose by 14.78 percent. Money flow increased in the banking system as businessmen deposited their money in banks after the Eid festival,” said MA Halim Chowdhury, managing director of Pubali Bank.

“Moreover, moderate import growth and record inflow of remittance ahead of Eid increased the availability of USD to the banks. As a result, money market remained stable since last month, as banks refrained from being aggressive in borrowing from the call money market,” he added.

In May, remittance hit record high at $1.75 billion in a single month, which was up by 22.43 percent from last year and 16.64 percent from a month earlier.