Forex crisis weighs on banks’ liquidity

The ongoing volatility in Bangladesh’s foreign exchange market – triggered by growing import financing – is putting pressure on banks’ liquidity.

Provisional data from the Bangladesh Bank show that the surplus fund in the banking sector dropped by 18 per cent or Tk 41,711 crore in the last ten months. At the end of April, excess liquidity in banks stood at around Tk 1,90,000 crore, down from Tk 2,00,000 crore a month ago.

Insiders say the country’s rising import payments are the key reason behind this decline. Surplus funds in the banking industry hit an all-time high of Tk 2,31,711 crore at the end of June last year.

A senior official of the central bank, on condition of anonymity, said almost all banks – including new and fourth generation ones – are currently facing a liquidity crunch due to their growing import financing.

The official added that the lenders are now going door to door of other banks and the Bangladesh Bank to cover their liquidity shortage. As a result, the overnight call money rate is hovering around 4.50 per cent in the last two months.

The overnight call money rate stood at 4.74 percent on Thursday.

Echoing the same, Dhaka Bank Managing Director and CEO Emranul Huq said, “The banking sector’s surplus fund has declined mainly due to growing import financing. The lenders now are spending local currency to buy USD for settling letters of credit (LCs).

The settlement of LCs, also known as actual import payment, rose by 49.66 per cent to $61 billion during July to March this fiscal year, reveals latest data from the central bank.

Of these, the settlement for petroleum imports rose by 87.12 per cent to $5.46 billion and the import payment for consumer goods rose by 41.54 percent to $6.86 per cent.

The Dhaka Bank chief said the import payment got faster due to fuel price hikes in the global market, caused by the Russia-Ukraine war.

“The main reasons behind the tight liquidity situation in the banking sector are the depreciation of local currency against USD and the growing credit demand in the post pandemic period,” said Pubali Bank Managing Director and CEO Saiful Alam Khan Chowdhury.

The private sector credit growth accelerated to 11.29 per cent in March, the highest since May 2019, when it was 12.16 per cent, according to the Bangladesh Bank data.

Chowdhury said the state-run banks were the major lenders in the call money market amid the pandemic, but they are now becoming buyers in the same market due to the liquidity shortage created by the growing import financing.

He spoke in favour of strong regulatory measures to cool down the foreign exchange market. The interbank exchange rate currently stands at Tk 87.50 per USD, which was Tk 84.80 per USD in July last year. Importers however said they are spending Tk 95 to Tk 96 per USD to pay import bills. The banks that are facing USD shortage to pay import bills go to the central bank for purchasing the currency. The country’s state-run banks are the major clients that buy USD from the central bank.

The Bangladesh Bank withdrew around Tk 52,500 crore from the banking sector by injecting around $6 billion during August to April 19 this fiscal year, which ultimately led to reduced surplus funds in the banking sector.

Current forex reserve situation

The country’s foreign exchange reserves are declining day by day due to growing import payments and a downward trend in remittance earnings.

Forex reserves fell to $41.92 billion on May 11 after paying the Asian Clearing Union $2.24 billion, as per the central bank data. Reserves were $46 billion on February 28 this year. The Bangladesh Bank Governor Fazle Kabir on May 18 said at a programme that the country’s forex reserves now stands at $42.35 billion. Industry insiders said the volume of imports will come down in the upcoming months as the central bank tightened its rules of luxury and non-essential product imports, such as sport utility vehicles, washing machines, air-conditioners, and refrigerators.