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Is Bangladesh Bank gaming the floating forex system to encourage remittance inflow?


On Tuesday, the Bangladesh Bank sold $129 million to local banks at a rate of Tk 92. On Monday, the rate was Tk 91.95.

The upping of the US dollar prices has essentially devalued the rate of the taka, even with the reinstatement of the floating foreign exchange rate.

The floating foreign exchange rate system, which was first introduced in 2003, was reintroduced for banks to set the US dollar rate based on demand and supply situations.

However, since the main supplier of the US dollars, Bangladesh Bank, is increasing the price for selling the greenback to the local banks, it is unlikely that the price of the US dollars will go down anytime soon.

Analysts are saying the central bank is taking such measures to encourage non-resident Bangladeshis, or NRBs, to send remittances through banking channels, as the flow of remittance, which is one of the lifelines of Bangladesh's economy, has dropped significantly in the last two quarters of the current fiscal.

The devaluations somewhat put the kerb currency market into a spiral, as dollar prices soar significantly.

At one point last month, exchangers outside of the formal banking system were selling a dollar for over Tk 100, the highest in Bangladesh’s history.

The record rise in US dollar prices in the kerb market, according to market insiders, has hurt the remittance inflow through banking channels as non-resident Bangladeshis, the main source of remittances for the country, were using informal transaction systems, such as Hundi or just plain old carrying and selling in the kerb market to get a better price.

For the last couple of months, the central bank imposed tight control on the dollar exchange rate, with a system called “managed exchange rate or floor rate”, due to the massive depletion of the greenback it has in its coffer.

As a result of it, analysts said, banks struggled to supply adequate US dollars for the payment of import costs, and the situation simultaneously prompted exporters to delay the encashment of their earnings resulting in a demand-supply mismatch.

The depletion took place due to a large gap between the amounts paid for imports through letters of credit and the cumulative inflow of foreign exchanges via exports and remittances.

The recovering post-pandemic economy of Bangladesh has been dealing with a massive boom in import costs, especially in the first nine months of the current fiscal.

Although exports data suggests a similar growth too, a significant fall in the remittance inflow from non-resident Bangladeshis has created a big gap, which, according to the Bangladesh Bank and analysts, made the reserves lose almost $1 billion every month.

The central bank’s spokesperson Md Serajul Islam said on Tuesday it has sold $6.079 billion to local banks in this fiscal.