How offshore banking will ease pressure on forex reserves

Offshore deposits will have an indirect impact on the country's balance of payment as they will increase dollar liquidity in banks, which will eventually ease pressure on foreign exchange reserves, said bankers.

"The Bangladesh Bank has to sell dollars from forex reserves to banks to meet import demand," said Mashrur Arefin, managing director of City Bank. "Dollar selling is one of the reasons behind reserve erosion."

Offshore banking will increase dollar liquidity, which will help reduce dollar selling and contribute indirectly to rebuilding reserves, he added.

Moreover, banks can swap dollars with the Bangladesh Bank for local currency. This swap will also boost reserves, said the seasoned banker.

According to data from the Bangladesh Bank, it sold a net total of $26 billion in foreign currencies over the last three years, from FY22 to April FY24, leading to a depletion of foreign exchange reserves from $41.83 billion in June FY22 to $20.46 billion as of 10 July FY24.

Mirza Elias Uddin Ahmed, managing director of Jamuna Bank, explained that the financial account is a component of the country's balance of payments, which had been experiencing a large deficit. One of the reasons for this is the imbalance in the two components of this index: the capital account and the current account.

"If the country can attract term placements from abroad through offshore banking, currently sourced from various banks, it would enhance the capital account. This becomes crucial as the country has become dependent on the capital account when the current account falls into deficit. Any gaps in the capital account directly affect the reserves."

Mirza Elias Uddin Ahmed, managing director of Jamuna Bank

The current account comprises three components — exports, imports, and remittances — which together form the current account balance.

On the other hand, the capital account includes three components as well. Foreign direct investment (FDI) decreased by 5% last year, indicating a challenge in attracting foreign funds to invest in the country.

Short-term loans, another component, have not been sufficient, leading to increased repayments and contributing to the gap in the financial account over the past year.

The third component, long-term loans, also did not align with the country's needs, with increased payments resulting in a reduction of over 6% in long-term debt.

Mirza Elias Uddin Ahmed emphasised, "If the country can attract term placements from abroad through offshore banking, currently sourced from various banks, it would enhance the capital account.

"This becomes crucial as the country has become dependent on the capital account when the current account falls into deficit. Any gaps in the capital account directly affect the reserves," he said, expressing confidence in the central bank's rational decisions to expand the capital account in the future.

Abul Kashem Mohammed Shirin, managing director of Dutch-Bangla Bank, said, "We are paying UPAS LC through offshore banking or discounting bills. For various short-term investments, we have to collect dollars from various banks at high rates. If we can create funds ourselves, then we will not have to depend on foreign banks anymore.

"This will indirectly help our reserves and also contribute to increasing the reserves of the country."