Forex market still unstable despite $12b injection

The Bangladesh Bank injected $12.60 billion in the country’s foreign exchange market from the forex reserves, along with a number of other initiatives over the course of 2022, but these moves merely put a dent to the instability that is plaguing this sector.

Data from the central bank show that the regulator pumped $7.47 billion in the forex market during the last six months alone. On Thursday, it sold $140 million to banks.

Industry insiders said the forex market is still very much under pressure due to the heavy burden of import payments, but it may cool down from next February. They added that the banks are now paying import bills deferred in the previous months.

Speaking to The Business Post, Dhaka Bank Managing Director and CEO Emranul Huq said, “The heavy burden of import payments is a key reason behind the pressure on forex market.

“Along with state-run banks, private commercial banks are also taking USD support from the central bank to meet their USD shortage. I am optimistic that the market will cool down next year as we reduced opening letters of credit (LCs) due to the ongoing crisis.”

Opening of LCs came down slightly thanks to the austerity measures, but the LC settlements are still quite high.

Latest data from the central bank show that LCs worth $4.02 billion were opened in November this year, down from $4.74 billion a month ago. LC settlements also fell in November to $5.60 billion, from $6.41 billion a month ago.

Former lead economist of World Bank Dhaka Office Zahid Hussain said, “Both the deferred payments and price rise of commodities in the global market were the major reasons behind the pressure on the forex market. “This pressure negatively impacted the country’s foreign exchange market.”

Bangladesh Bank data reveal that the country’s gross forex reserves stood at $33.83 billion on December 28, but the usable reserves were $25.83 billion. The gross forex reserves had reached the record highest at $48 billion in August last year.

“It is very concerning that the opening of LCs did not come down to the expected level despite multiple initiatives,” Zahid Hussain added.

In July this year, the central bank imposed up to 100 per cent LC margin against the import of luxury and nonessential items. The same month, the regulator asked banks to inform it 24 hours before opening an LC worth $3 million or above as part of its austerity measures.

The Bangladesh Bank in August last FY began pumping USD to the forex market when the banks began facing USD shortages due to the growing import payments, triggered by economic recovery from the Covid-19 crisis.

This crisis intensified just a few months later when Russia invaded Ukraine in February this year. The war further disrupted the global supply-chain, which in turn caused the food prices to skyrocket in the international market.