Now cenbank buying dollars from banks to boost reserves

In a reversal of trends, the Bangladesh Bank is now purchasing dollars from commercial banks in an effort to boost the country's current reserves. 

The move comes as a stark departure from the past one and a half years, during which the central bank routinely sold dollars to commercial banks.

Additionally, the central bank has verbally instructed these banks to clear the outstanding amounts of forex loans obtained from the Export Development Fund (EDF), which was disbursed from the reserves.

Md Sarwar Hossain, assistant spokesperson of the Bangladesh Bank, told The Business Standard that some banks are selling foreign exchanges to the central bank.

He, however, clarified that the central bank did not provide any instructions to the banks to sell dollars to it. Instead, these banks have surplus dollars which they have opted to sell to the central bank.

A central bank official wishing anonymity, however, revealed that the higher authorities of the Bangladesh Bank instructed certain banks to sell dollars to the central bank. Consequently, these banks began selling dollars to the central bank, even though the banking sector is suffering from a dollar crisis.

On Tuesday and Wednesday, commercial banks sold $52 million and $21 million, respectively, to the central bank, resulting in a total of $73 million received by the central bank, said the official, adding this infusion has helped alleviate the shortfall in forex reserves.

The official further confirmed that the banks continued selling dollars to the central bank on Thursday, with at least three private banks participating in these transactions.

Industry insiders have observed a significant decline in the opening of import Letters of Credit (LCs) compared to previous periods.

From July to May of the current fiscal year, the opening of import LCs decreased by approximately 25% year-on-year.

As a result, the pressure for payments has decreased, and there is less deferred payment stress than before. Overall, the demand for dollars in the banking sector has diminished.

However, not all banks are experiencing a surplus of dollars, as some still face a shortage and are unable to obtain dollars in the interbank market, said industry people, adding banks that possess excess dollars have the option to sell them in the interbank market, where they can secure a higher price.

Currently, banks are buying US dollars at the rate of Tk108.50 in the case of remittance and at TK107 for export proceeds. To purchase dollars from the interbank market, they would need to spend a maximum of Tk109. In contrast, the central bank's selling rate is TK106, which is Tk3 less than the interbank rate.

A top official from a commercial bank, speaking on condition of anonymity, expressed concerns about the ongoing dollar crisis that banks have been facing for several months.

The decreased opening of import LCs due to the scarcity of dollars in the banking sector has deterred banks from showing interest in initiating new LCs. These activities by the central bank, if continued, are likely to further deepen the crisis, potentially resulting in fewer LC openings, which would ultimately impact production and exports.

Despite the central bank's goal of increasing net reserves as per the conditions set by the International Monetary Fund (IMF), it has been selling dollars to state-owned commercial banks to cover the cost of government purchases and essential goods import LC payments.

Officials of the Bangladesh Bank mentioned that a total of $13.5 billion has been sold from the reserves in the current fiscal year, up until 22 June.

The Bangladesh Bank sold $73 million on Wednesday and $65 million on Thursday, amounting to a total of $808 million sold this month. Previously, the central bank would sell an average of $100 million per day.

Dollar sales from reserves continue despite the central bank urging state-owned banks to acquire dollars from the local market to reduce the depletion of reserves.

According to a central bank official, maintaining a net reserve of $24.46 billion by June is a requirement imposed by the IMF to secure the second tranche of a $4.7 billion dollar loan package. The net reserve of the Bangladesh Bank dropped to nearly $20 billion, compared to approximately $21 billion in February. However, due to the recent upward trend in remittances from wage earners and the Bangladesh Bank's inclination to limit the sale of dollars from reserves, the gross reserve has once again surpassed the $30 billion mark.

Banks asked to pay $230m EDF loan due

The central bank has issued instructions to the banks to settle the outstanding amount of the Export Development Fund (EDF) loans, which were disbursed from the country's foreign exchange reserves.

Officials of the central bank have stated that the total outstanding EDF loans with the banks are approximately $230 million, with one state-owned bank alone owing $170 million.

EDF loans are provided to support exporters in importing their raw materials, and the loans are meant to be repaid when the export proceeds are received.

Bankers have reported that a number of their customers have faced delays in receiving their export earnings. In some cases, the buyers have failed to pay the full amount, which puts additional pressure on the banks to manage their dollar reserves and creates an extra burden given the current situation, they added.

Typically, exporters have up to 270 days to repay these loans. However, the Bangladesh Bank's inspection revealed that some exporters have misused loans obtained from the EDF by failing to repay them on time, resulting in significant forced loans.

Forced loans occur when clients fail to make their LC payments by the maturity dates, and the banks are still obligated to fulfill their responsibilities to foreign banks. Delays in LC settlements can occur in both import and export transactions, forcing banks to purchase dollars from the local market or their own reserves to meet their obligations to the central bank.

According to the Bangladesh Bank, the demand for EDF loans has decreased due to a decline in imports amid the ongoing dollar crisis. The monthly average value of imports, which used to be $7 billion, fell to $5.18 billion in May last year.

Additionally, the central bank's stricter measures to ensure the repatriation of export proceeds have also contributed to the decline in EDF loan applications, bankers said.

"We are receiving fewer loan applications from the EDF due to various factors, including higher interest rates.

"Furthermore, exporters now have access to a local fund called the Exporters' Fund for Payment of Foreign Bills (EFPF), where they can obtain loans at a 4% interest rate, further reducing the demand for EDF loans," said Md Zakir Hossain Chowdhury, acting spokesperson of the Bangladesh Bank.

EDF loan further slashed by $200m in 3 weeks

The Bangladesh Bank reduced the EDF outlay by $200 million within the last three weeks. This measure was taken in order to bolster the country's net foreign exchange reserves, as stipulated by the International Monetary Fund (IMF) conditions.

Earlier in May, the central bank had already reduced the EDF by $400 million. Taking into account this latest adjustment, the current size of the EDF stands at $4.4 billion, compared to its initial amount of $7 billion before the first cut made in December last year. In total, the fund has been reduced by $2.6 billion over the course of six months.

Exporters have expressed concerns about the reduction in the EDF size, as they anticipate an increase in their difficulties and challenges going forward.