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Although a series of new decisions by the Bangladesh Bank (BB) are slated to temporarily increase the flow of dollars in the market, economists and bankers are unsure if these measures will offer a long-term solution to the problem.
The central bank has made several policy changes, effective from Sunday, to ease the pressure on the country’s foreign exchange (forex) reserves.
According to its new instruction, from now on, banks have to encash 50% of the total balance held in exporters’ retention quota (ERQ) accounts in the names of relevant exporters.
The retention limit of realized export proceeds has also been reduced to 7.5%, 30% and 35% from 15%, 60% and 70%, respectively.
According to the Bangladesh Bank notice, the revised limit will remain valid until December 31.
Meanwhile, the limitations on the transfer of funds between offshore and onshore banking units have also been eased.
Offshore banking units will now be able to place up to 25% of the banks’ total regulatory capital in domestic units for a period of six months to settle the import payment of capital machinery, industrial raw materials and imports by the government.
The policy will remain in effect until December 31 as well.
As part of the import monitoring framework, banks will now be required to report all types of foreign exchange transactions, including those of offshore banking operations.
They must also submit a report to the Bangladesh Bank 24 hours before opening letters of credit (LC) for imports.
The reporting is required for transactions valued at $5 million and above. The new rules exclude imports by the government, according to a notice issued by the central bank on Thursday.
Earlier, banks could reserve foreign exchange equivalent to 20% of their regulatory capital. Bangladesh Bank has reduced this limit to 15%.
Other issues
According to bankers, there is currently $720 million in the ERQ accounts of exporters.
The fresh move from the Bangladesh Bank will enable the injection of $360 million into the foreign currency market instantly.
Another $569 million will be added to the market as inflow following the central bank’s decision to cut 5% points of the net open position (NOP) limit of commercial banks from 20% to 15% .
All these new measures come as the country’s forex reserves dropped below $40 billion for the first time in two years after the authorities paid import bills of the Asian Clearing Union.
Meanwhile, after Eid-ul-Azha last week, the pressure on payment of import bills increased, and the banks were forced to approach the central bank.
The central bank then sold dollars from the reserve to solve the problem.
On July 14, Bangladesh Bank sold $135 million from the reserves to the banks.
The price per dollar was set to Tk93.95.
All these decisions came after the foreign exchange reserves of Bangladesh slipped below $40 billion for the first time in nearly two years, owing to higher imports caused by surging commodity prices globally and the appetite in the economy rebounding from the coronavirus pandemic.
Reserves stood at $39.70 billion on July 14.
While economists are welcoming the decision of Bangladesh Bank’s new governor, they are concerned that the central bank’s new policy may not solve the country’s forex reserve problem in the long run.
“Doubts remain as to how much the problem will be solved by the decisions that have been taken, because a large part of the money in ERQ is from the garment sector. From this money, they also settle their various liabilities abroad. If it is reduced now, they may have to buy dollars from outside to pay these debts later. It will increase their costs. Moreover, if any kind of shock comes suddenly, they will be in a big crisis,” Zahid Hussain, former lead economist of the World Bank Dhaka office, explained.
“Moreover, if you suddenly need money, then you have to take permission from Bangladesh Bank to settle all those liabilities. In other words, the ease of doing business is being eroded,” he added.
Hussain further said: “I do not think these decisions will pay off very well in the short run or the long run to solve the forex crisis.”
AB Mirza Azizul Islam, economist and former financial adviser to the caretaker government thinks that even if there is no cause for concern, initiatives should be taken to bring the reserve back to its previous state as soon as possible.
“Imports should be reduced, especially luxury goods. The government has taken initiative and increased the LC margin. But how effective it gets still remains to be seen. Exports should be increased and initiatives should be taken to increase remittance.”
“In the kerb market, the price of the dollar is higher than in the bank. So, arrangements should be made to bring all remittances through banking channels,” he added.
Between July and May, imports increased to $75.4 billion, up 39% year-on-year, whereas exports grew 33% to $44.58 billion during the same period.
Full fiscal year import data has not been published yet.
Exports hit an all-time high of $52.08 billion in the just-concluded fiscal year, giving much-needed breathing space to the country amid ongoing volatility in the foreign exchange regime.
As a result, the total trade deficit stood at $30.81 billion in 11 months of FY22.
On the other hand, remittance inflows declined 15% in the outgoing financial year compared to FY21.
A capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or another financial institution has to have as required by its financial regulator.
This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted assets.
(DT)
