Forex market volatility deepens

Volatility in the country's foreign exchange market has intensified once again as Bangladesh Bank has commenced tinkering with the exchange rate of the taka against the US dollar.

Bangladesh Bank had decided on June 2 to allow the exchange rate of the taka to float against the US dollar but recently backtracked from its stance, causing the forex market to become volatile again.

Bankers said demand for the American greenback was still higher than the supply due to soaring import payments and a slump in remittance inflow.

In addition, the inter-bank exchange rate set by the central bank has been unable to offset the ongoing volatility due to the inadequate supply of the greenback.

The inter-bank exchange rate stood at Tk 92.95 per US dollar yesterday. In contrast it was Tk 84.95 a year ago.

However, banks now sell dollars to importers largely at Tk 97 to Tk 98 and purchase it at Tk 96-Tk 97 from exporters.

They also try to attract remittance by offering Tk 96 to Tk 97 to exchange houses abroad.

The US dollar continues to remain dear although Bangladesh Bank has so far supplied $7.43 billion this fiscal year from the reserve to cool the market. The country's foreign exchange reserve stood at $41.7 billion as of yesterday.

Bangladesh is not alone when it comes to weakening of the local currency. Many countries, including India and Pakistan, are now witnessing their currencies losing out against the US dollar.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said the floating exchange rate was a good tool to keep the foreign exchange market stable.

"So, the central bank should follow the method in the interest of the market," he said.

Emranul Huq, managing director of Dhaka Bank, said the foreign exchange market was still facing pressure due to the inadequate remittance inflow and high demand for imports.

Besides, the foreign exchange market is not fully active now, which also widened the woes of lenders, he said.

Monzur Hossain, research director of the Bangladesh Institute of Development Studies, said the central bank was now unable to independently draw up the monetary policy, which was why it was difficult for the BB to allow a floating exchange rate.

If the lending interest rate cap of 9 per cent can be withdrawn, the central bank will get room to manoeuvre its way out from the ongoing exchange rate crisis, he said.

Bangladesh Bank can impose a ceiling on the inter-bank exchange rate if it does not draw up a monetary policy independently, he added.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said exporters were not that much willing to sell their dollars on hopes that the exchange rate of the taka would fall soon.

Many banks are now unable to settle their import bills on time due to the shortage of the dollar, he said.

In such a situation, this will increase the letters of credit confirmation charge, he said.

If the LC confirmation charge increases by 50 basis points, the country's banking sector will have to spend an addition of $500 to $700 million per year, Mansur said.

The central bank should do away with the ongoing uncertainty prevailing in the foreign exchange market such that exporters sell their dollars to banks without any hesitation.

Contacted, Md Serajul Islam, spokesperson of the BB, said the central bank was now using different tools, including injection of the dollar almost every day.

"The BB is doing everything so as to keep the market stable," he said.