Cenbank introduces currency swap with banks to rebuild reserves

The Bangladesh Bank has introduced a currency swap guideline for the first time, under which it will buy dollars from banks at the spot rate in exchange for the taka.

The new arrangement aims to rebuild foreign exchange reserves and ease local currency liquidity stress.

According to the guideline issued yesterday, the interbank reference rate, which is currently Tk110 per dollar, will be considered as the spot rate.

When banks take their dollars back, they will have to pay an interest rate, which will be lower than the repo rate. In this case, the interest rate will be the difference between the three-month average SOFR for the dollar and the repo rate for the taka, according to the central bank guidelines.

For instance, at present, the SOFR rate is 5.3% and the repo rate is 8%. The difference is 2.7%, which will be charged annually to banks for the swap. Currently, banks borrow money from the central bank at an 8% annual repo rate. However, if they opt for a currency swap, they will only have to pay an annual interest rate of 2.7%.

Moreover, banks will receive back their dollars at almost the same rate that they sold them to the central bank. Each deal shall be in multiples of 1 million of the foreign currency, starting from a minimum value of 5 million and equivalent taka, with a tenure of 7 to 90 days.

Rollover may be allowed, applying the prevailing rates according to the guideline, which takes immediate effect.

However, Islamic banks will be exempt from interest payments under the guidelines.

The new arrangement will be a win-win situation for both the central bank and commercial banks as it will help increase gross reserves while banks will also be able to borrow local currency from the central bank at a cheaper rate, said a senior executive of the Bangladesh Bank.

However, the inflow of dollars through currency swaps will not help build net reserves as these are short-term liabilities. Net reserves are calculated by excluding short-term liabilities from gross reserves, he added.

At present, some Islamic banks are in liquidity stress because of loan corruption and deposit withdrawals due to a lack of trust. However, those banks have good dollar holdings due to remittance inflows. In this case, those banks can go for swap arrangements to manage their liquidity stress, said another senior officer of the central bank.

Currently, banks have been borrowing Tk10,000 crore to Tk20,000 crore per day from the central bank to manage the liquidity stress caused by the dollar shortage.

Banks have been buying dollars from the central bank to meet their LC (Letter of Credit) requirement. The Bangladesh Bank has been selling more than $1 billion from its reserves every month, which is mopping up local currency in the market and causing liquidity stress.

In July to January of the current fiscal year, the Bangladesh Bank mopped up Tk87,000 crore through sales of nearly $8 billion. Such dollar selling also accelerated reserve erosion. 

The country's gross reserve stood at $19.9 billion on 14 February, according to Bangladesh Bank data.

Zahid Hussain, former lead economist of the World Bank's Dhaka office, said banks now have an additional option for liquidity management. If necessary, banks can deposit dollars with the central bank and receive taka.

"Usually, banks don't have extra dollars because all dollar transactions are pending LC payments. As a result of this initiative, banks will now be able to receive taka by depositing dollars even in the short term," he told TBS.

Salim RF Hossain, chairman of the Association of Bankers, Bangladesh and managing director of BRAC Bank, said, "I think currency swap is a good initiative."

He believes that with the movement of the dollar, its flow will increase. Banks will now have the ability to deposit dollars when needed and retrieve them as necessary.

"It is beneficial for everyone," he told TBS.