Dollar market: BB moves away from strict policy  

The Bangladesh Bank (BB) has withdrawn the action it had taken against the treasury heads and managing directors (MD) of six commercial banks for allegedly making excessive profits from dollar trading. 

At the same time, the banks have been allowed to count the profits earned during May-June period from the dollar market as their income. All these developments came as the BB has moved away from its strict and ‘wrong policy’ regarding the dollar market

The market witnessed chaos due to several 'wrong policies.' The central bank, at one stage, fixed exchange rates for the greenback, which had bearing on the inflation amid the increased import costs.

Meanwhile, the crisis took a turn for the worse as the central bank’s action against six commercial banks triggered a trust-deficit in the banking system of Bangladesh.

The banks are - Prime Bank, BRAC Bank, The City Bank, Dutch-Bangla Bank, Southeast Bank, and Standard Chartered Bank. However, the central bank’s banking regulations and policy department has officially informed the banks about its new decision.

Anis A Khan, former chairman of the Association of Bankers, Bangladesh, said the central bank finally understood the reality that the supply and demand of the greenback is not controlled by the banks and the exchange rate cannot be held back.

This is why the regulator left the authority of fixing the exchange rate and withdrew its actions against the commercial banks, he said, expressing fear that there would have been a big crisis in the country’s foreign trade as the central bank’s action had prompted the foreign banks to turn away from the Bangladeshi banking sector. 

“It is a signal that the central bank has started taking careful and deliberate decisions for this sector. It is good for the country,” said Anis A Khan.

The dollar crisis began in April. The central bank initially tried to combat the crisis by hiking the exchange rate slowly and offloading greenback from its forex reserve. As all these efforts went in vain, the banking sector regulator visited the commercial banks and came to know about making extra profits from the dollar trade.

In further development, the heads of the six banks’ treasury departments were removed from their positions on 8 August for allegedly making excessive profits. The treasury department usually ensures the supply and demand of taka and dollars.

The central bank later sought explanation from the managing directors of the six banks on 17 August, for allegedly destabilising the dollar market by making excessive profits. As per the section-46 of the Bank Company Act, the Bangladesh Bank is empowered to remove the directors and managing directors of the banks.

The move spread panic in the banking sector, but failed to rein in the dollar price and help combat the crisis. Rather, the foreign banks started turning away and stopped extending new loans to the local banks due to the central bank move.

Also, some of the foreign banks canceled the line of credit facility, causing problems to some Bangladeshi banks in paying the import liabilities. It eventually pushed up the import costs further.

The Bangladesh Bank, in its letter to the six commercial banks, said they can make profits complying with the banking law and regulations, principles, and directions of the central bank. But it is by no means desirable to earn excessive profits through negative banking and damaging the country’s macroeconomy. 

The allegations have been reviewed  thoroughly and the banking policy and regulations department came to know that this was the first ever recorded case of making excessive profit by the banks. Hence, the central bank has exempted the MDs from the charges raised under the section-46 and allowed the banks to reinstate the removed treasury heads.

Apart from that, the banks have been asked to count half of the profits made through dollar trading during May-June period as their income and earmark the remaining half for the corporate social responsibility (CSR) sector.

The central bank had earlier directed the six banks to keep the total earnings in a separate account and asked them to comply with all banking rules in foreign currency trade and other banking activities in future and to maintain ethics for the sake of the nation. They were also asked to refrain from any activities that may destabilise the currency market. 

Serajul Islam, deputy executive director and spokesperson of the Bangladesh Bank, said the issue has been settled conditionally as the MDs have offered apology for the situation. There is no problem for the treasury heads to rejoin work now.

The MDs also extended thanks to the central bank for acquitting them from the charge. 

Selim RF Hussain, chairman of the Association of Bankers, Bangladesh, told Prothom Alo, “We specially thank the central bank and its governor in particular for continuous advice, fair and practical decisions.” 

“The banking sector has long been an integral part of the country’s economy, and is now an important stakeholder of all sectors. The banking sector is determined to work jointly with other sectors to improve the country’s economy,” he added.

The dollar price was recorded at Tk 85.80 at the beginning of the current year. Then the Russia-Ukraine war appeared on the scene and pushed up the price of oil and food commodities in March. 

Bangladesh registered a sharp rise in import costs in the following days when the export and remittance income remained unchanged. It led to a long-lasting dollar crisis. 

The central bank hiked the dollar price to Tk 95 on 11 August, but failed to pull the rein of the exchange rate.  

Against such a backdrop, the apex financial regulatory body embraced a floating exchange rate and allowed the market to determine the dollar price on the basis of supply and demand. 

The Bangladesh Foreign Exchange Dealers Association (BAFEDA) and the Association of Bankers, Bangladesh (ABB), in consultation with the central bank, fixed the maximum dollar price on 12 September.

The maximum dollar exchange rate was fixed at Tk 108 for remittance and Tk 99 for export income. And, the rate for paying import liabilities will be determined by averaging the rates of remittance and export income. 

The banks are allowed to charge additional Tk 1 with the import rate. The banks bought the dollars at a maximum rate of Tk 107 on Thursday and the import rate was comparatively higher.

However, the exchange rate is still not fully floating. Rather, the bankers termed it as controlled floating.