End ABB-Bafeda dollar price fixing to overcome reserve crisis: Zahid Hussain

Allowing dollar prices to be determined by the market, rather than being fixed by the Association of Bankers, Bangladesh (ABB) and the Bangladesh Foreign Exchange Dealers Association (Bafeda), will enhance reserves by boosting the supply of dollars through official channels, said Zahid Hussain, former lead economist of the World Bank, Dhaka office.

He met with Bangladesh Bank Governor Abdur Rouf Talukder on Thursday to discuss the country's economic condition, the challenges it faces, and how to control inflation. The central bank's deputy governors were also present.

After the meeting, Zahid Hussain told The Business Standard that the central bank has identified three challenges for the country's economy: the dollar crisis in the forex market, inflation, and the risk-based asset growth of the country's banks.

"I suggested that they change the existing model to solve the dollar crisis in the forex market," he said. "This would increase the flow of dollars into the country's banking channel, which would strengthen the reserves and reduce the impact of hundi."

In September, the ABB-Bafeda set the dollar rate which is currently Tk110 per dollar, and there is an additional 5% incentive for remitters.

Zahid Hossain said the central bank should adopt a new exchange rate model to boost the dollar flow. The model can be like this – with the current Tk110 exchange rate, banks would have the flexibility to buy dollars at a maximum rate of Tk120 per dollar and a minimum rate of Tk100 per dollar, which would be adjusted in line with market conditions.

Banks' BC selling rates will be 0.50/0.100 basis points higher, which is expected to reduce the influence of the hundi market and increase remittances through the banking channel, thereby easing the country's dollar crisis, he added.

Steps to control inflation

Zahid Hussain said he has advised the central bank to increase interest rates to control inflation. The central bank does this by gradually increasing the rate at which it lends to banks (the policy rate), which in turn leads to higher loan interest rates at the consumer level.

Currently, the interest rate on consumer loans is set at the six-month weighted average treasury rate plus a corridor of 3.5%. This means that the maximum interest rate for consumer loans is currently 10.70%.

Zahid Hossain said that the rising rate of treasury bills will lead to higher interest rates on customer loans in the coming months. He noted that the central bank has shifted to an interest-oriented monetary policy in the current fiscal year, away from the money supply-based policy that it had followed previously.

He also suggested that the central bank should gradually increase the 3.5% interest rate corridor along with the policy rate in order to control inflation. He said that if the corridor is increased by Tk1 in each monetary policy meeting, it will be more than Tk6 by the end of 2026, but that this could change depending on market conditions.

On reducing risk-based assets of banks

Zahid Hussain said that the biggest challenge facing the country's banking sector is the increase in risk-based assets, such as defaulted loans. He attributed this increase to loan fraud and other irregularities in banks, and warned that it could lead to higher inflation.

He also noted that the central bank has recently passed the Banking Company Act and the Finance Companies Act, which are expected to improve banking governance. However, he stressed that the central bank must also enforce these laws effectively.

The central bank will announce its monetary policy for the second half (January-June) of fiscal year 2023-24 in the last week of December this year. In preparation, the bank is holding meetings with economists and research organisations to gather input on the types of policies needed to support the overall economy and overcome the country's economic challenges.

Meetings have already been held with the Policy Research Institute (PRI), the South Asian Network on Economic Modeling (Sanem), and former caretaker government advisor Wahiduddin Mahmud.