The dollar reserves held by Bangladesh’s commercial banks have sharply declined by $1.72 billion in just five months, highlighting the fallout from Bangladesh Bank’s ineffective strategies amid a crippling dollar crisis.
The central bank’s instruction to repay significant foreign dues within short time, its dollar purchases to inflate reserve figures, and inadequate oversight of dollar market manipulation collectively wreaked havoc on the forex market, pushing the dollar price to maximum Tk 129 from Tk 120, market experts said.
Such sharp increase in dollar prices has further inflated the cost of foreign loan repayments, requiring borrowers to give significantly more funds to meet their obligations in foreign currencies.
In November, the gross foreign currency balance with commercial banks dropped to $4,383 million down from $4,615 million in October, according to the Bangladesh Bank data.
The amount marked the lowest level in 44 months since March 2021, when the balance stood at $4,344 million, data showed.
The level also decreased from $4,981 million in September, $5,265 million in August and $6,088 million in July and $6,103 million in June, the central bank’s data revealed.
Bankers said that BB governor Ahsan H Mansur instructed banks to clear a significant portion of foreign due payments by December 2024, further intensifying the dollar shortage.
The central bank should have extended the repayment period of some large payments to avoid such pressure on the market, said M Masrur Reaz, chairman and chief executive officer of Policy Exchange Bangladesh.
Additionally, the central bank has reportedly halted dollar sales to commercial banks to prevent further depletion of its foreign exchange reserves. At the same time, the BB has been purchasing dollars from the market to bolster its reserves, adding further pressure to the already strained market.
Masrur suggested dollars be injected strategically, based on thorough market assessments, to stabilise and cool down the dollar market.
He also criticised the central bank’s instruction to purchase dollars within Tk 123 when the official rate stood at Tk 120, stating it could create chaos and confusion on the market.
Despite a rise in remittance inflows and export earnings in recent months, commercial banks’ dollar holdings have failed to improve, bankers said.
The remittance inflow for the July-November period of FY25 rose to $11.13 billion, up from $8.8 billion in the same period of FY24.
Bangladesh’s export earnings during the same period increased to $19.90 billion from $17.82 billion in FY24.
Foreign direct investments also dropped amidst political turmoil and unrest, compounding the economic challenges.
The banking sector has been grappling with a severe dollar shortage since early 2022, sending shockwaves through the country’s macro-economy.
Inflation, production costs, and energy prices have risen significantly since then.
The situation worsened after the political shift, as a significant amount of foreign debt payments piled up, and pressure to repay the loans intensified following the interim government’s swearing-in.
The burden of the dollar shortage is not evenly distributed among banks. A few banks hold a substantial portion of the country’s dollar reserves, while many others struggle to meet their customers’ foreign currency demands.
This shortage has strained the country’s ability to pay for imports and has weakened the Bangladeshi taka, with the exchange rate jumping to Tk 129 from Tk 120 in the past week.
Bankers have also accused some banks of manipulating dollar prices due to lax monitoring by the Bangladesh Bank, taking advantage of the crisis for their own benefit.
The exchange rate has seen a steady rise, from Tk 85.80 in December 2021 to Tk 104 in December 2022 and Tk 110 in December 2023.
Businesses said that higher dollar rates mean increased import costs, which, in turn, would raise production expenses and consumer prices.
This could worsen the country’s inflation crisis, affecting purchasing power and the overall consumer spending.
While the central bank anticipates reserve improvement as foreign lenders begin loan disbursements, the crisis underscores deep-rooted vulnerabilities in the banking and exchange systems, experts said.