Bangladesh Bank needs to probe into exchange market

When the country is reeling under severe inflationary pressure following price hike of essential commodities and the rise in fuel oil prices in the international market, which is also having a fallout on the prices of different commodities, the local banks are charging exorbitantly high exchange rate from the importers while opening letter of credits (LCs) further contributing to the worsening price situation.

As reported in The Business Post Thursday, the rising exchange rate of the US dollar against the local currency has placed a huge burden on local importers triggering a spillover effect on the local market over the last several months. The Bangladeshi Taka was devalued further against the greenback on Wednesday in the wake of a dollar shortage in the banking sector. The interbank exchange rate hit Tk 86.20 per dollar for the first time on the day, up from Tk 86 the previous day. The report says a high official of a Chattogram-based industrial group even complained of imposing Tk 89 per dollar while opening LCs when the interbank rate was Tk 86.20 per USD. Many banks are charging even more than Tk 90 against each dollar, Tk 4 above the BB-set exchange rate.

Although the country’s foreign exchange reserve declined slightly to USD 44 billion on March 15, from USD 46 billion on February 28, experts believe that the situation is still comfortable as it is equivalent to more than seven months’ import bills. Then why are the local banks suffering from foreign exchange shortages? Economists and bankers said the rising import payment due to the price hike of certain commodities in the global market, declining trend of remittance, and the end of deferral support on payments for imports can be attributed as key reasons for the shortage. The remittances have fallen further in February despite increased incentives from the government, and experts blame the return of the “hundi” system, an illegal method of cross-border transaction, for this decline. Bangladeshi expatriates sent $ 1.5 billion in February 2022, down 16 per cent over the same period last year. February’s figure was 12.22 per cent lower than that of the previous month when remittances stood at $ 1.7 billion, as per the central bank’s latest statistics. However, the importers accused some banks of creating an artificial crisis of USD, which needs to be probed by the regulator– the Bangladesh Bank. There was demand from the importers for pumping forex in the interbank market by the central bank, which they did, according to a BB’s chief economist Habibur Rahman. The central bank sold more than USD 3.73 billion to the country’s commercial banks as of March 23, without affecting the exchange rate. Our report says that the US dollar’s interbank exchange rate started rising since July last year mainly due to the sharp rise of import payment when the exchange rate of the greenback was Tk 84.80.

There was a time until the early 1990s when the central bank dictated exchange rates and the commercial banks had no choice but to follow it. But with the introduction of free-market economic policies and subsequent reforms in the banking sector, fixing exchange rates became the commercial banks’ cup of tea. It was left to the market forces to decide. And the BB chief economist rightly said they could not interfere in matters, such as fixing exchange rates for opening LCs. “We simply cannot intervene in banks’ L/C rate in an open market,” Habibur Rahman was quoted as saying in the report. However, regulators always have a role to play when something goes on beyond market rules, when there is market manipulation, and when certain market players attempt to take advantage of a situation to exploit the clients. The central bank needs to probe into the matter and come up with the right steps to fix the situation.