Forex crisis bleeds economy dry throughout the year

The persisting shortage of greenback bled dry Bangladesh’s economy, businesses and consumers in 2022, brought on by multiple factors – especially the rise in import payments during Covid-19 recovery and global economic crisis triggered by Russia’s invasion of Ukraine.

This shortage, which started becoming apparent since the beginning of this year, hit our external sector hard. The rapid appreciation of USD and supply chain disruptions pushed up fuel and commodities prices in the international market, which led to increased import payments.

Banks faced difficulties in paying import bills almost throughout the year, which directly and indirectly impacted businesses and consumers. The local currency Taka devalued by 24.41 per cent against the USD this year despite a series of initiatives to cool down the forex market.

Exporters in the country gained from those devaluations, but importers and consumers were at a loss. Moreover, small and medium businesses suffered difficulties in importing goods or raw materials due to the USD shortage.

To meet the USD shortage, the country’s banks took $7.62 billion as support from the central bank reserve in FY22. The banking regulator injected further $5 billion to banks in the five months of this fiscal year, which negatively impacted on forex reserves.

When did USD appreciation start?

The greenback rate against the local currency was stable at Tk 84.80 per USD for a long time, and then it started to appreciate from mid-August of 2021.

At the end of December 2021, the USD exchange rate reached at Tk 85.80 per USD due to growing import payments created by the recovery jump, after two years Covid-19 crisis.

The interbank exchange rate hit Tk 86.20 per USD for the first time on 23 March of this year, a month after Russia invaded Ukraine. The USD rate then continued to rise throughout the year, going as high as Tk 107 per USD under the interbank exchange rate.

The growing trend of import payment due to the price hike in the global market, declining trend of remittance and the end of deferral support on payments for imports were the key reasons behind the appreciating USD rate.

Bangladeshi expatriates had sent $1.5 billion in February 2022, a 16 per cent drop when compared year-on-year. On the other hand, import payment was at $46.67 billion during July-January of last fiscal year.

Inter-bank exchange rate ineffective

The inter-bank exchange rate set by the central bank became mostly ineffective in May this year, because Banks were imposing higher USD rates on importers than the official rate.

Usually, the banks impose Tk 0.5 – Tk 1 more than the official rate, but they have been charging Tk 8 – Tk 10 more per USD, putting a significant burden on importers. Industry insiders say the banks had not followed the fixed rate of USD due to the high demand. During April to June this year, importers paid Tk 94 to Tk 95 per USD for opening Letters of Credit (LCs), while inter-bank exchange rate was around Tk 86.70 per USD.

Banks gain unusual profit

Amid the forex crisis, some banks made excessive profits from selling USD, which prompted the Bangladesh Bank to ask six banks to transfer their treasury heads to human resources departments in August of this year.

The banks were Standard Chartered Bangladesh, Brac Bank, Dutch-Bangla Bank Ltd, The City Bank, Southeast Bank, and Prime Bank.

A Few months later, the central bank found more banks who were involved in making excessive profits from US dollar selling. This issue triggered severe criticism in the banking sector.

Forex reserves see sharp fall

The country’s foreign exchange reserves had continued to rise amid the Covid-19 pandemic mainly due to slow import payments and budget support from the donor agencies. The forex reserves hit a record high of $48 billion in August last year. The scenario then changed when the pandemic crisis started to ease.

The reserves dropped to $45 billion in December of 2021 and it continued to dip throughout 2022 due to growing import payments. Forex reserves fell by $11.45 billion to $34.01 billion in December this year, as per the central bank data.

The sharp fall of forex reserves triggered serious concerns among policymakers and the government.

Austerity measures

The government and the central bank implemented a series of initiatives to keep the foreign currency reserves from falling further. The central bank in May toughened its rules for luxury item imports.

A day later, the government decided to stop foreign trips of its officials, and postponed the implementation of less important projects that require imports.

The National Board of Revenue (NBR) – in that month – slapped additional taxes on imports of luxurious and non-essential items.

BB adopts floating exchange rate

The Bangladesh Bank in September adopted a floating exchange rate for USD with the aim to reduce pressure on foreign exchange reserves, which in turn pushed up inter-bank exchange rate.

A floating exchange rate is a system where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies.

After the central bank’s move, the Bangladesh Foreign Exchange Dealers Association (BAFEDA) and Association of Bankers, Bangladesh (ABB) fixed multiple USD rates for different segments such as exports, imports and remittance earnings.

Foreign banks halt credit facility renewals

Many foreign banks had decided to stop renewing credit facilities to local banks because they were involved in making excessive profits from the sale of USD.

Those foreign banks had also increased the charge and commission for the LC service, which pushed up the import costs.

Hundi resurges

Except for a few months, remittance earnings had continued to dip throughout 2022 due to a resurgence of the hundi system after Covid-19 crisis eased. Bangladesh Foreign Exchange Dealers Association’s (BAFEDA) fixed rate on remittance further impacted remittance earnings.

Foreign exchange houses and banks offer a maximum of Tk 108 per USD to remitters, while Bangladeshi expatriates get the highest Tk 115 per USD when they send money through the illegal hundi system.