Bangladesh is witnessing record remittance inflows and higher export earnings this December compared to any previous period.
However, the country’s banks are grappling with an acute dollar shortage.
To address the situation, most banks are purchasing remittance dollars at higher rates, while the open market (kerb market) has also seen a spike in dollar prices.
Although the dollar market had stabilised for four months following the formation of the interim government, instability resurfaced over the past 15 days.
In response, Bangladesh Bank has introduced several measures, including a directive on Tuesday (23 December) that restricts banks from buying remittance dollars at rates exceeding Tk123.
This represents a Tk3 increase from the previously declared maximum rate of Tk120 per dollar. Furthermore, the central bank has sought explanations from 13 banks found buying dollars at elevated rates.
Economists, however, caution that the dollar market will not stabilise unless the exchange rate is fully market-driven.
They attribute the rising dollar prices to two primary factors - increased demand for dollars due to current realities and indecision by Bangladesh Bank regarding a market-based exchange rate policy.
According to industry sources, imports of essential goods have surged ahead of Ramadan, leading to a higher demand for dollar payments.
Bangladesh Bank has also instructed banks to settle all overdue letters of credit (LCs) by December, prompting some banks to pay premium prices for dollars to meet LC obligations.
Additionally, to meet the reserve requirements stipulated by the International Monetary Fund (IMF) by year-end, Bangladesh Bank has ramped up dollar purchases from commercial banks.
During a recent visit, an IMF delegation stated in a written report that they are willing to extend new loans to Bangladesh, subject to several conditions, including the implementation of a fully market-driven exchange rate.
While Bangladesh Bank has indicated its intention to adopt such a system, specific guidelines remain absent.
This lack of clarity has led some banks to pre-emptively increase dollar prices.
Former chief economist of the World Bank, Zahid Hussain, remarked, “The rising demand for dollars is undeniable, but the current surge in dollar prices also reflects the consequences of past policy mistakes. The previous government’s decision to artificially stabilise the dollar exchange rate depleted reserves, caused record depreciation of the Taka, and exacerbated inflation. Had the exchange rate been left to the market, a temporary spike in prices would have occurred, but the situation would have gradually stabilised.”
He further noted that Bangladesh Bank continues to rely on its old policy of managing the exchange rate through a crawling peg system rather than fully adopting a market-driven approach, as recommended by the IMF.
He explained, “This has led some banks to anticipate further increases in dollar prices and act accordingly. At the same time, Bangladesh Bank is settling overdue LC payments while demand for LCs for commodities and consumer goods rises. Although remittance and export earnings have increased, supply has not yet offset demand. External assistance of USD 2–3 billion from organisations like the World Bank, ADB, and IMF, expected over the next three months, may ease the crisis. However, transitioning to a fully market-driven exchange rate is urgently needed.”
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, echoed these concerns, stating, “Banks are facing significant demand for dollars, leading many to offer higher incentives for remittances. The central bank’s directive to clear overdue LC payments by December has compelled some banks to purchase dollars at higher rates to meet these obligations. Additionally, the situation has normalised to the extent that large LCs for items like fuel oil and LNG were opened in November and December. LC openings for consumer goods have also increased ahead of Ramadan, further driving up dollar prices.”
