Bangladesh Bank buying dollars from banks to increase reserves

The Bangladesh Bank is collecting dollars from banks to meet the International Monetary Fund's (IMF) end-of-year forex reserve requirements as part of the $4.7 billion loan programme.

The central bank bolstered its reserves this week by purchasing $200 million from Islami Bank on Tuesday and over $100 million from other banks throughout the other working days.

Mezbaul Haque, spokesperson for the Bangladesh Bank, yesterday confirmed the dollar purchases, saying, "We are consistently providing dollar support to banks. Currently, we are purchasing dollars from some banks."

He told The Business Standard, "Banks have the option to repay the central bank in taka or dollars. Currently, Islami Bank has a substantial dollar reserve, so they are selling it to the central bank."

A senior official at the central bank told TBS that according to IMF terms, a net reserve of $17.48 billion should be maintained at the end of December. However, the country's current net reserve is close to $16 billion. It means that in the next few days, the central bank will need to increase the reserve by around $1.5 billion to meet the terms.

The central bank's data as of 20 December show the country's gross reserves, according to the IMF's BPM6 formula, stood at $20.68 billion.

When calculating net reserves, the IMF excludes liabilities with a maturity of less than one year, such as the Asian Clearing Union (ACU) due bills. This exclusion results in a difference between the gross reserves held by the central bank and the net reserves data provided to the IMF.

For the past three years, the central bank has consistently sold dollars from reserves to commercial banks. The sales amounted to $7.62 billion in FY22, $13.58 billion in FY23, and around $7 billion in the current fiscal year. Primarily, these dollars are allocated to cover the import bills of 5-6 types of products, including food, fuel, and fertilisers.

The central bank official said, currently, there is no possibility for dollars to come from foreign sources in line with the reserve target. As a result, it is not possible to increase the reserves in this short period without purchasing dollars from banks.

However, according to a Bangladesh Bank report, several Islamic banks are facing a cash reserve ratio (CRR) shortfall with the central bank. There is an opportunity for Shariah-based banks to address this shortfall by selling dollars.

Spokesperson Mezbaul Hague said when a bank has a surplus in its net open position in foreign currency, it can sell dollars to the central bank.

Currently, banks are selling dollars to the central bank at Tk110. On the other hand, banks are collecting dollars as remittances at Tk109.50. However, beyond this, banks can give a maximum incentive of 2.5% on the collection of remittance dollars from their own funds.

Bankers said the central bank's plan was to buy dollars from banks at the end of December. As part of that plan, several Islamic banks have collected remittance dollars at higher rates.