Remitters will now get additional incentives of up to 2.5% from banks in addition to the 2.5% offered by the government as banks have increased efforts to boost remittance earnings amid the foreign exchange crisis.
This means remitters will get up to Tk115.5 per USD if they send money via banking channels as the dollar rate has been set at Tk110 for them. The government introduced a 2% incentive in 2019 for remittances sent through legal channels, which was later raised to 2.5%.
The Bangladesh Foreign Exchange Dealers’ Association and the Association of Bankers, Bangladesh at a meeting on Friday decided that banks would cover the cost of the extra incentive from their own funds.
AB Mirza Azizul Islam, economist and former adviser to caretaker government, welcomed the move. He told the Daily Sun, “Let us hope for the best. But there will still be a difference between the hundi rate and that offered by banks.”
Bangladesh received $1.34 billion in remittances in September this year, marking a 41-month low and a year-on-year decline of around 13%. Bankers and experts said remittances fell because of the higher dollar exchange rate in the open market, which prompted expats to send money via informal channels, including hundi.
The Bangladesh Bank in a circular on Thursday instructed banks to disburse remittances among beneficiaries within two working days.
The decision that banks would offer extra incentives came amid the government’s various initiatives to stabilise the foreign exchange market. The Bangladesh Bank introduced a market-based dollar rate in September last year. It also instructed banks to increase the dollar supply. Besides, it has continued support for banks to open letters of credit for importing essential goods.
Former lead economist at the World Bank’s Dhaka Office Dr Zahid Hussain told the Daily Sun an unequal competition is going on in the dollar market.
“Leaving the dollar rate to the market will level the playing field because everyone will then negotiate with customers to determine the rate. Some worry that leaving it to the market will lead to exchange rate overshooting, but the concern is ungrounded.”
Explaining further, the economist said, “Before the dollar rate was set by the central bank, market-based exchange rates had been in effect from 2003 to June 2022. During that period, there was no serious instability in the dollar market despite the 2006 political unrest, the 2008-09 food crisis, rising oil prices in the international market, inflation rising above 12% in 2010-11, the Covid-19 pandemic and the subsequent supply chain disruptions, and the Russia-Ukraine war.”
The Bangladesh Bank managed the floating exchange rate well until it started dictating in mid-2022, he added.
Policy Research Institute Executive Director Ahsan H Mansur said Bangladeshi policymakers are sensitive about market-based dollar pricing.
“They feel once pricing is left to the market, no one can control where it will end up. The Bangladesh Bank is also sceptical about whether dollar prices can be brought under control again after leaving it to the market,” he said.
He further said, “The Bangladesh Bank says it has left the decision to set the dollar exchange rate to the market. But remitters see that it gives different directives at different times.”
“Last week, the central bank gave banks verbal permission to buy dollars at higher prices. As a result, remitters do not have confidence in sending money through banking channels.”
Unstable dollar market
Money exchange houses in different areas, including Dhaka’s Dilkusha and Gulshan, sell dollars at arbitrary prices. In some places, customers are paying up to Tk118-120 for every dollar. There is a desperate need for dollars among various groups, especially those who want to go overseas for studies and patients seeking medical treatment abroad.
The value of taka against the USD fell by about 20% in phases over the past year and a half. The dollar price in 2021 was Tk85.2. Now it has risen to Tk110.5 in banks and Tk118-120 in the open market, with the difference being up to 8.6%.
Export proceeds stuck abroad
Officials of the Bangladesh Bank believe export earnings of nearly $1 billion have remained stuck abroad for two years. The central bank wants to bring in the money to tackle the dollar crisis. However, many exporters involved with the money have closed their businesses while some have left the country.
The banking regulator said exporters must bring in the full export proceeds for FY22 and FY23 by 31 October. In case of failure, action will be taken as per the Foreign Exchange Regulation Act. As per the rules, export income has to be brought in within 120 days of sending the goods.
Bangladesh’s foreign exchange reserves stood at $48 billion in 2021. The government was keen to raise it $50 billion. But now the figure has dipped to $20.95 billion as per the International Monetary Fund’s calculation method. Gross reserves, which include the Export Development Fund and loans from reserves, stood at $26.68 billion on 19 October.
Bangladesh is losing about $1 billion per month from reserves as the central bank has continued to sell $30-35 million per day to meet commercial banks’ demands. Over the last two years, Covid-19 impacts as well as spikes in fuel and food costs in the international market raised expenditures by several notches globally, and Bangladesh was also affected by that.
The government turned to reserves to handle the situation, but the world was then hit by the Russia-Ukraine war, which further raised fuel and food prices in the global market. As a result, Bangladesh’s reserves declined for more than a year due to higher import payments as well as lower-than-expected export earnings and remittance inflows.