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In spite of the injection of $130 million into the market by Bangladesh Bank, volatility persisted in the foreign exchange market yesterday.
The central bank injected $5 billion between July 1 and May 11 of the current fiscal year and another $1 billion in the last 20 days.
The latest injection took it to $6.07 billion, an all-time high.
Before this fiscal year, the central bank supplied a maximum of $1.34 billion in FY19 to keep the exchange rate between the taka and the dollar stable.
Despite all the efforts put in by the central bank, many banks yesterday sold each US dollar for Tk 92 to Tk 94 to importers due to an acute supply shortage of the foreign currency.
The Daily Star yesterday contacted eight banks to know whether they followed the BB-set exchange rates. Of them, six said they had no choice but to sell each dollar to importers for Tk 91 to Tk 94.
The BB had asked banks to sell the dollar at Tk 89.15, but the majority of banks did not stick to the rate in the last two days. In addition, no bank bought or purchased US dollars on the interbank platform in the last two days.
An official of a commercial bank, on condition of anonymity, said a good number of banks earlier purchased dollars at Tk 95 to Tk 96, which was why they have to face losses if they sell those at the interbank rate.
The central bank has so far depreciated the taka against the US dollar seven times alone this year and now it stands at Tk 89. This has created an enormous pressure on the banks, which have no greenbacks available to settle import bills.
The dollar-strapped banks are now scrambling to secure dollars from the exchange houses located abroad.
The exchange houses owned by the Bangladeshi banks now follow the central bank’s rate, which is Tk 89.20 per dollar, but the foreign companies are not abiding by the instruction.
Against the backdrop, it is not possible for banks to follow the rates at this moment.
“The volatility in the foreign exchange market yesterday worsened from what was on Tuesday,” said one banker.
The central bank also did not provide liquidity support yesterday as per the demand of the banks.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said the forex market yesterday remained the same as it had been the day before.
“If the price of the US dollar was allowed to go up naturally, the demand for it would have gone down and the supply would have gone up,” said Zahid Hussain, a former lead economist of the World Bank’s Dhaka office.
He questioned how much US dollars Bangladesh would be able to save by cutting development expenditures, curtailing foreign tours and raising import duties.
The notion that artificially holding back the dollar price can contain inflation is flawed, he said.
“This is because if imports come to a standstill owing to the dollar crisis, inflation will go up by leaps and bounds.”
The economist said Sri Lanka committed the same mistake, which was keeping the exchange rate fixed, and Bangladesh was doing that now.
“In order to keep the dollar price fixed, Sri Lanka had injected dollars into the market. Bangladesh Bank is also doing the same,” said Hussain.
“But how long can you keep doing this? Will you be able to keep the exchange rate fixed when you run out of the reserves?” he asked.
“Why aren’t we learning from the Sri Lankan crisis? Sri Lanka had injected dollars in the market throughout the year. But when it ran out of reserves, the market became volatile.”
Higher imports against moderate exports and remittance flow brought the foreign exchange reserves of Bangladesh to $42.29 billion on May 25. It was $46.15 billion on December 31.
Hussain urged the government to ensure external stability first, reasoning that the country does not print US dollars.
“It is a resource. So, in order ensure the supply of the resource and save this resource, the biggest weapon is to let the price adjust in line with the market situation.”
Because if the price goes up, people become cautious when it comes to spending while the suppliers get the incentive to increase supply.
“But we have blocked both paths by fixing the rate,” he said.
He says the exchange rate acts as a shock absorber during crises.
“If you remove the shock absorber, how long can one [the economy] run? And the reserves are like spare tyres. You use it when the tyres of the car get punctured,” he said.
(TDS)
