Bangladesh Bank (BB) is set to introduce a single exchange rate for the US dollar in a move aimed at stabilizing the foreign exchange market and improving transparency. Due to the dollar crisis, businesses have faced significant challenges, particularly in opening letters of credit (LCs). This initiative comes amidst a year of persistent challenges in managing the dollar crisis and ensuring equitable access for importers.
Context: A Year of Challenges in Dollar Management
Throughout 2024, the central bank has been actively engaged in foreign exchange management, providing dollars to facilitate import payments as the local currency depreciated multiple times. Businesses have faced significant challenges due to the dollar crisis, particularly in opening letters of credit (LCs). Commercial banks often struggled to provide US dollars at the central bank’s fixed rate, forcing importers to pay higher prices for dollars to meet their liabilities.
After seven months of implementing a crawling peg exchange rate system in spot purchases and sales of US dollars, the Bangladesh Bank (BB) is now considering increasing the mid-rate to Tk 119 from Tk 117 per greenback, according to central bank officials.
Announcing this upward adjustment amid the recent US dollar volatility, which pushed the exchange rate for remittances to Tk 128. With the new mid-rate, the exchange rate will be allowed to swing by 1.5 percent to 2 percent from it. Despite these higher dollar rates, the prices of essential goods in the domestic market did not ease in 2024.
Transition to a Single Exchange Rate
To address this issue, the central bank plans to finalize a single exchange rate for the dollar, following the implementation of a crawling peg system seven months ago. Under this system, the central bank will introduce a reference rate, allowing banks to trade dollars with a maximum Tk1.0 difference between buying and selling rates. A circular formalizing this decision will be issued soon, aimed at stabilizing the dollar market. “Banks that violate these instructions will face fines of a minimum of Tk10 lakh, or 5 percent of the LC transaction value,” said a managing director of a private bank who attended a meeting with the BB governor.
The BB will publish a daily interbank exchange rate based on bank transactions, according to central bank officials. The interbank exchange rate has not been fully operational in recent months. Besides, the exchange rate for remittance collection will be around Tk 123 per US dollar. Importantly, the exchange rate for remittance collection and export earnings will be the same. The central bank warned that banks found to be involved in spurring volatility in the foreign exchange market will face financial penalties starting from a minimum of Tk 10 lakh.
Governor’s Directives to Banks
Bangladesh Bank Governor Dr. Ahsan H. Mansur shared the directives during a meeting at the central bank headquarters with the managing directors and treasury heads of around 40 banks.
Representatives from various banks, including Janata Bank, Rupali Bank, Sonali Bank, Agrani Bank, Standard Chartered Bangladesh, HSBC Bank Bangladesh, Dhaka Bank, City Bank, Mercantile Bank, Pubali Bank, and Mutual Trust Bank, were also present. At the meeting, central bank officials shared data indicating an improvement in the external position of the foreign exchange market, according to a source who was present.
The central bank rolled out Tuesday a more flexible exchange-management regime styled Bangladesh Foreign Exchange Market Spot Reference Exchange Rate (RR) in its latest bid to bring stability to the overheated foreign exchange market.
Issuing a circular on the last day of 2024, Bangladesh Bank’s foreign-exchange policy department (FEPD) said, “The new system will come into force completely from January 12, 2025, from when the banking regulator will start publishing the RR on its website twice a day—at 12:30 pm and 6:00 pm.”
But the authorized dealer (AD) banks will start reporting their foreign currency buy-sell transaction-related information through a template prescribed by the central bank’s FRTMD or forex reserve and treasury management department from January 05, sources at the BB said.
The authorized dealers shall, before 11:30 am, report for transactions executed till 11:00 am. In the afternoon, they shall provide information on transactions executed from 11:00 am to 5:00 pm before 5:30 pm.”
From January 12 onwards, BB will publish a daily benchmark reference rate, defined as the weighted average of freely quoted exchange rates in market transactions with customers and other dealers.
Implications for the Dollar Market
The foreign exchange reserves recently crossed $21 billion as per the BPM-6 calculation of the International Monetary Fund (IMF) after declining in November due to the clearance of overdue letter of credit (LC) obligations. The growing trend of remittance and export earnings has contributed to the increase in the country’s US dollar stocks. The difference between the buying and selling rates should be less than Tk 1 per US dollar.
The banking regulator will strictly monitor compliance with the guidelines and set up a complaint cell under the senior leadership of the BB. The ultimate intention of the central bank is to move to a market-based exchange rate regime eventually; in the interim, the central bank is planning to adopt some measures to ensure transparency and stability of the foreign exchange market. The central bank attributed the ongoing US dollar market volatility to several interconnected factors.
One of the reasons is the increased demand for US dollars at the end of the financial year, which sees a spike in loan repayments and other financial obligations.
