Depletion of reserves shows no signs of abating

Several banks including state-owned are unable to pay their LC liabilities

Hasan Adnan

The dollar status in foreign accounts (nostro accounts) of the Bangladeshi banks increased slightly. However, the supply of dollars is much less than the liabilities of banks. As a result, banks still have to approach the central bank to settle their import letter of credit (LC) liabilities. The central bank also continued to sell dollars from reserves. As the day goes by, the loss of reserves is also increasing. In the first 26 days of July, the amount of reduced reserves stood at $1.52 billion.

In line with the data of Bangladesh Bank, on June 26 of this year, the foreign reserve dollar status of the country's commercial banks was $5.53 billion, which is 8% percent more than in May. Although at the end of June, the short-term foreign debt of the country's banking sector was $13.65 billion. Of this, $970 million was deferred payment or deferred liability. This foreign debt of about $1 billion has been created mainly due to the failure of LC liabilities on time. The central bank believes that despite import controls, new LCs worth $14.38 billion will be opened in the three months from June to August this year. Out of this, the potential filing amount of back-to-back LCs will be $2.5 billion.

Bangladesh Bank and related sources say that the state-owned Sonali, Janata, Agrani and Rupali banks are failing to pay their import LC liabilities every day. The overdue deposits of these banks are now around $1 billion. Apart from government LCs, state-owned banks are also unable to pay private-sector LC liabilities. At the beginning of the day, the main task of the state-owned banks is to collect dollars from the Central Bank. Every day these banks are sending proposals to buy billions of dollars to Bangladesh Bank. But for Bangladesh Bank, the sales amount is limited to a maximum of 100 million dollars.

Those concerned say that the signs of stabilization of the dollar market are still not clear. Rather, the country's banks are increasingly at odds with foreign banks due to their failure to pay the LC liability of imports. Major foreign banks have already reduced their credit limits to Bangladeshi banks. The situation is getting worse after the international credit rating agency Moody's and S&P Global downgraded Bangladesh's credit rating. The dollar market in the country may become more unstable in the future.

Syed Mahbubur Rahman, former Chairman of the Association of Bankers Bangladesh (ABB) said to Bonik Barta, "The dollar market has improved slightly. But the crisis has not subsided at all. We are still unable to open import LCs on demand. Due to insufficient supply of dollars, interbank dollar trading is not smooth sailing."

Currently, a top executive of Mutual Trust Bank Mr. Rahman also said, "The governor has said that the dollar rate will be left to the market in September. We look forward to seeing that. Remittance flows may increase if the dollar exchange rate is left to the market. Besides, the export earnings will also improve. Then the dollar situation of the banks can also improve."

By reviewing the data of Bangladesh Bank, it can be seen that in July 2021, the foreign dollar reserves of the country's banks were $6 billion. Since then, the dollar crisis in the country is increasing. As a result, the amount of dollars in the nostro accounts of the banks also decreased. In October last year, the amount of reserves of the banks fell to $4.50 billion. After that, the situation gradually improved. On June 26 of this year, the foreign reserve status of banks stood at $5.53 billion. Compared to the 2021-22 financial year, this reserve of banks has increased by 6.23% in the last financial year. Banks mainly store dollars in foreign accounts or nostro accounts for payment of import LC liabilities and foreign loans.

Due to the continued depletion of reserves and the dollar crisis, many foreign banks are withdrawing their short-term loans from the private sector of Bangladesh. Due to this, in the last six months, the short-term foreign debt of the private sector has decreased by $2.76 billion. As of December 2022, the position of such foreign debt to the private sector was $16.42 billion. At the end of June this year, the short-term foreign debt position fell to $13.65 billion. However, at this time, the delayed LC liability or deferred payment of the banks increased instead of decreasing.

According to the data of the central bank, at the end of December last year, the status of deferred payments in the banking sector of the country was $690 million dollars. At the end of June this year, the delayed filing status increased to $970 million. Among other short-term foreign loans, $7.69 billion is buyers' credit. Besides, direct short-term foreign loans are $3.54 billion, back-to-back LCs are $840 million and other liabilities are $600 million.

Bangladesh has gone through a topsy-turvy ride in terms of foreign trade throughout the fiscal year 2021-22. A record $89 billion in imports that year created a record trade deficit. Along with the trade deficit of $33.24 billion, the current account deficit of the government stands at $18.69 billion. The country's balance of payments deficit has also reached $5.38 billion. In this situation, Bangladesh Bank has reined in the country's import letters of credit (LC) since the beginning of the fiscal year 2022-23. Along with the dollar crisis, the import volume has decreased by 14.11% due to the tightening of LC opening conditions.

In the first 11 months (July-May) of the fiscal year 2022-23, the country's trade deficit stood at $17.16 billion. Within this time, $64.76 billion worth of goods were imported. And the export of goods was $47.60 billion. In the 11 months of the financial year, remittances came in at $19.41 billion. In all, a deficit of $8.80 billion has been created in the country's balance of payments or foreign transactions. Earlier in the fiscal year 2021-22, the deficit was $5.59 billion.

Banks have been forced to sell about $13 billion from the central bank reserve in the 2022-23 financial year alone to pay off their LC liabilities and foreign loans. Bangladesh Bank continued to sell dollars even in July. As of July 30, the sales volume from the reserve has crossed $1 billion. On July 19, Bangladesh Bank's gross reserves were $29.68 billion. However, according to International Monetary Fund (IMF) guidelines (BPM6), the reserves were $23.31 billion.

Md. Habibur Rahman, the chief economist and executive director of Bangladesh Bank thinks, it may take time until December for the foreign exchange market to be completely normal. He said to Bonik Barta, "National elections will be held in December or January. There is some apprehension and anxiety in the economy of any country around elections. Bangladesh is no exception in this regard. However, the country's export earnings and remittances are on a positive note. On the contrary, the cost of imports has come down a lot. Because of this, Bangladesh Bank does not have to sell dollars in the market like before. I think the dollar situation will be completely stabilized after the national elections."

Bangladesh Bank has projected how much import LC can be opened in the three months from June to August this year. It shows that LCs worth $4.89 billion can be opened in June, $4.75 billion in July, and $4.74 billion in August. That is, in these three months, a total of $14.38 billion dollars of LC is estimated to be opened. The central bank says that back-to-back LCs of $2.5 billion can be opened in these three months. However, banks have already opened more LCs than estimated in June and July.

Some top executives of several banks told Bonik Barta, "At the moment, there is a demand to open import LCs of $8 billion per month in the country. If only $4 billion of LC is opened there, then it is a symptom that the greater economy is in crisis. Hence, imports cannot be controlled for a long time by force. In order to prevent loss of reserves, foreign investment should be increased along with remittance and export income." 

Translated by
Sabidin Ibrahim

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