Dollar market volatility: Central bank's explanation

The dollar market has experienced significant volatility towards the end of the year, with rates spiking to Tk 128 in the open market before settling at Tk 123 following central bank intervention. 

This instability has been attributed to increased demand for dollars, driven by rising imports ahead of Ramadan and the repayment of outstanding letters of credit (LC) bills.

Reasons behind the volatility

Bangladesh Bank, in a recent notification, outlined several factors contributing to the current situation:

Year-end pressure: December marks the end of the financial year, leading to heightened demand for dollars to settle loan repayments.

Reduced dollar supply: To meet IMF targets, the central bank has ceased dollar sales, reducing the interbank supply of foreign currency.

Banking challenges: The downgrade of Bangladesh's credit rating has strained the correspondent relationships of local banks with foreign institutions. This has disrupted the opening of UPAS LCs, deferred payment arrangements, and offshore banking loans.

Remittance issues: The central bank cited the monopolistic practices of aggregators and middlemen in remittance collection as a destabilising factor in the exchange rate.

Commercial bank imbalances: Mismatches in dollar inflow and outflow among commercial banks have further exacerbated the market volatility.

Foreign debt payment circular: A directive requiring foreign debt payments by December has placed additional pressure on the market.

Measures taken by Bangladesh Bank

In response to the instability, Bangladesh Bank has implemented the following actions:

Exchange rate cap: The central bank has set the maximum rate for remittance collection at Tk 123 per dollar. For cross-currency transactions, the rate must not exceed this cap through cross-calculation.

Monitoring system: A real-time dashboard and data monitoring system have been introduced to track and manage exchange rate fluctuations effectively.