Forex crisis spills over into call money market

The ongoing strain on Bangladesh’s foreign exchange regime has created cash shortages in the banking sector, sending the interbank call money rate to a 19-month high yesterday.

The weighted average rate in the interbank call money market, where banks borrow from each other on an overnight basis, stood at 4.65 per cent yesterday in contrast to 3.52 per cent a month ago and 1.89 per cent a year prior, data from the central bank showed.

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The previous peak was recorded in August 2020 when the rate stood at 4.7 per cent.

The current forex crisis confronting the financial sector are mainly responsible for squeezing the supply of cash in the banking sector. The cash shortage may exacerbate further this month amid growing consumption in Ramadan and the upcoming spending spree centering Eid-ul-Fitr.

In addition, credit demand is on the rise as the economy has been firing on all cylinders, helped by a sharp fall in coronavirus caseloads.

“But ensuring a sound foreign exchange market will play a pivotal role in riding out the ongoing crisis,” said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

Banks are purchasing American greenbacks heavily from the central bank to settle their letters of credit (LCs) amid lower-than-expected remittances and exports than escalating import payments.

This forced the Bangladesh Bank to inject a record $3.78 billion between July 1 and March 23 to keep the exchange rate of the taka against the dollar stable.

This means banks have to spend more than Tk 32,500 crore to buy the dollars. One USD yields Tk 86.20 as per the current interbank rate.

As a result, a large amount of liquid funds is now stored at the central bank, creating a cash shortage in the financial sector.

“The call money rate will climb further if banks continue to purchase the dollars from the central bank,” Rahman said.

Md Habibur Rahman, chief economist of the central bank, says higher inflation has worsened the situation as it has pushed the lending and deposit rates.

The official figure of the Consumer Price Index surged to a 16-month high in February driven by soaring costs of essential food ranging from staples such as rice, edible oil and vegetables to protein items.

“Some banks now enjoy excess liquidity while others are facing a cash crunch. This has also triggered the call money rate,” Habibur said.

The rise in credit demand from borrowers has also contributed to the upward trend of the rate.

“Demand for cash usually surges during Ramadan, and this year is no exception, putting extra pressure on the call money market,” said Emranul Huq, managing director of Dhaka Bank.

Mirza Elias Uddin Ahmed, managing director of Jamuna Bank, called for reining in both higher imports and inflation to mitigate the volatility in the money market.

Between January and June, imports soared to $46.67 billion, up 46 per hundred year-on-year. Exports increased 29 per cent to $27.97 billion.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, says the instability in the call money market is the result of the crisis prevailing in the foreign exchange regime.

“The balance of payments situation is now in dire straits due to the lower inflow of foreign exchanges.”

Remittance flow from migrant workers that gave much-needed cushion to the economy at the height of the pandemic has now slowed, deepening the foreign exchange crisis at banks.

Bangladesh received $15.30 billion in remittances in the first nine months of the current fiscal year, a decrease of 21.56 per cent compared to the same period a year ago.

“The central bank should depreciate the taka against the dollar to ward off the crisis,” said Mansur, also a former official of the International Monetary Fund.

The exchange rate now stands at Tk 86.20 per US dollar compared to Tk 84.80 a year ago.

“If the central bank devalues ​​the exchange rate of the local currency to some degree, imports will decline. And domestic demand will decrease automatically when imports are curbed.”

Banks have also started to pay back the loans taken from the central bank to implement the stimulus packages. This has also caused a cash shortage in the banking sector, Mansur said.

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