Bangladesh Bank buys nearly $1b from market as dollar falls

The Bangladesh Bank (BB) has purchased around $1 billion in just one and a half months as the dollar weakened against taka amid steady inflows and subdued import demand.

Between 13 July and August, the central bank bought $948 million from commercial banks through seven auctions, reversing its earlier approach of selling dollars to contain the rapid depreciation of local currency taka and support state agencies in paying import bills.

Over the past three years until fiscal year 2024-25, the BB sold more than $25 billion from its foreign exchange reserves, largely to cover import bills for fuel, fertiliser and food.

According to economists, a weaker dollar could hurt remittances and exports, and the recent purchases by the BB are intended to maintain a steady supply of the greenback.

After the fall of the Awami League-led government in August last year in a mass uprising, the BB suspended dollar support for government imports amid low foreign currency reserves.

Subsequently, a larger-than-usual inflow of remittances and improved export earnings provided the interim government with some much-needed relief.

In March this year, as foreign exchange reserves began to rebound and the decline of taka slowed, the central bank began to purchase dollars.

A senior BB official said the dollar purchase is to stabilise the forex market, since sharp upward or downward movements are not good for the market.

Earlier, in May, the BB adopted a floating exchange rate regime to meet conditions tied to a $5.5 billion International Monetary Fund (IMF) loan programme, a year after introducing a crawling peg system under which the exchange rate moved within a band.

Central bank officials said that despite the market-based exchange rate, they would intervene if the rate rose above Tk 123 per dollar or fell below Tk 121, maintaining the exchange rate band.

Yesterday, the dollar traded at Tk 121.72, according to central bank data.

The purchases are also part of a plan to rebuild foreign exchange reserves, which had fallen below $20 billion, raising concerns about the country's ability to pay for imports, according to officials.

Reserves began to recover this calendar year thanks to higher remittances, export earnings and a slow import growth. It reached $26.19 billion by August 28, according to the IMF's calculation method.

At the same time last year, reserves stood at $20.59 billion, BB data show.

Areif Hussain Khan, executive director and spokesperson for the BB, said the central bank intervenes to prevent excessive market volatility.

"We want to keep the forex market stable because neither a big rise nor a steep fall is a good indicator. If the dollar weakens too much, exporters and remitters feel discouraged and suffer losses," said Khan.

Ashikur Rahman, principal economist at the Policy Research Institute, said low investment and reduced imports of capital machinery have lowered demand for dollars.

"In such a situation, the taka could appreciate. If the taka strengthens, both exports and remittances will be significantly discouraged. To ensure they remain competitive, artificial demand for dollars is being created through these purchases," he said.

He added that the buying supports exports and remittances while helping rebuild reserves.

"If any shock hits in the coming days, this will allow the authorities to manage it. In the current context, for the next six months, this is the right strategy. Buying dollars to build up reserves essentially means sustaining the positive momentum for remittances and exports," said the economist.