Recent Currency SWAP Policy of CenBank

MD. BADRUL MILLAT IBNE HANNAN: Recent Currency SWAP Policy of CenBank: Inflationary or Deflationary- Bangladesh has been a member of the International Monetary Fund (IMF) since 1972, taking 12 loans since its inception in 1974. The IMF aims to reduce poverty, promote international trade, and enhance global economic growth and financial stability. As of January 30, last year the International Monetary Fund (IMF) approved a $4.7 billion loan for Bangladesh to aid the country’s economic policies in the development that is expected to calm the edginess backdrop the health of the Bangladesh economy. The decision came in the meeting of IMF’s executive board.

The Executive Board of the International Monetary Fund (IMF) approved a 42-month ECF/EFF arrangement of SDR 2.5 billion equivalent to 231.4% of quota or about US$ 3.3 billion, and a synchronic RSF arrangement of SDR 1 billion equivalent to 93.8% of quota or about US$ 1.4 billion to support Bangladesh’s economic policies. SDR figures for the program are converted at the market rate of US dollar per SDR on the day of program approval.

Although Rahul Anand, the Mission Chief of the International Monetary Fund (IMF) said that Bangladesh was not in crisis. Just like other countries around the world, Bangladesh is dealing with the impact of global shocks – first from the pandemic and then from the ongoing war in Ukraine. Bangladesh’s robust economic recovery from the COVID-19 pandemic was interrupted by Russia’s war in Ukraine.

IMF provided some bindings to receive USD 4.7b loans. Increasing the tax-GDP ratio, implementing the VAT law, establishing an asset management company to dispose of soured loans, decreasing the banking sector’s default loans to within 10 percent and raising the capital adequacy ratio to the BASEL III requirement of 12.5 percent, are among the reforms agreed upon.

As per Bangladesh Bank’s data on October 3, 2023 the reserves stood at USD 26.93 billion, whereas according to the IMF’s recommended formula specified the Balance of Payments and International Investment Position Manual (BPM6), the reserves were calculated at $21.03 billion. In these reserves of USD 26.93 billion, the balance of Nostro Account was included. Because this was the gross reserves. But according to BPM6 of IMF Nostro Account balance to be blackballed. Such exclusion of Nostro Account Balance has outcasted the country’s Net International Reserves (NIR) a little bit.

From September of last to till, country’s reserves have been wandering around USD 17 billion to 20 billion which effectuates tension for the settlement of the Balance of Payment (BoP) as our country is the import based.

January 17, 2024 the Central Bank of Bangladesh (BB) has issued the monetary policy for the second half of FY January to June 2024 period. BB to adopt crawling peg to curb exchange rate volatility, raises policy interest rate, restrains private sector credit growth to combat inflation
To counter the persistent inflationary pressure, Bangladesh Bank (BB) has confirmed its commitment to a contractionary policy stance during the second half of FY24 (January-June), with the aim of inflation anticlimax to 7.5%.

This year the main theme of the Monetary Policy is to strengthen local currency which means to control the inflation and provides the relax to the people of the country. Inflation has been wandering around 9%, with food inflation in Bangladesh soaring to 12.54% in August 2023 – the highest level in the past 13 years, according to the Bangladesh Bureau of Statistics (BBS).

The new monetary policy statement also said, to tackle the inflation Bangladesh Bank will implement a crawling peg system to regulate unusual fluctuations in the foreign exchange (forex) rate value. The crawling peg is a system of exchange rate adjustments in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates. It helps control currency moves, usually during threats of devaluation. The purpose of crawling pegs is to provide stability.

The Bangladesh Taka (BDT) against the USD maintains alignment with the market rate, supported by assessments using the Real Effective Exchange Rate (REER) Index and internal evaluations. While the BDT experienced a marginal depreciation from July to December 2023 compared to the same period the previous year, it stood at 110.00 per USD as of December 31, 2023.

This positioning remains broadly competitive among peer countries, reflected by the relative gravity of recent depreciation of BDT vis-à-vis peer countries’ currencies. But one the main objectives of present monetary policy are to tighten the money supply. For the tightening of money supply. Cenbank usually applies the techniques to increase the Repo rate or Policy rate. Currently Cenbank has increased the Repo rate to 8.00 percent. Here Repo rate increase means BDT will be more expensive. BDT expensive leads the inflation decreases.

Monetary policy also stated that, central bank today cut the private sector credit growth target to 10% from 11%. Considering both the public and private sectors, domestic credit growth is projected to grow by 13.9% by the end of June 2024.

In the meantime, of controlling inflation, Bangladesh Bank has introduced Currency SWAP on February 15,2024 with a minimal of 7 (seven) days to maximal of 90 ( ninety) days. Currency swaps were originally done to get around exchange control, governmental limitations on the purchase and/or sale of currencies. Although nations with weak and or developing economies generally use foreign exchange controls to limit speculation against their currencies, most developed economies have eliminated controls nowadays.

The scheduled banks of the country have been suffering from liquidity crisis since after COVID-19 pandemic. This is mainly (but not only one) because of the scheduled banks have been purchasing USD from Central bank to meet the imports payment. Bangladesh Bank has sold more than 9 billion USD to the scheduled banks in first seven months of this FY. The reason why BDT has gone to the vault of the central bank and USD has been brought to the scheduled banks vault and Accounts.

The scheduled banks which have the foreign currencies in their Nostro Accounts can exchange with BDT to meet up their daily operations. Exchange rate with BDT vis-a-verse 110 per USD plus the rate difference between Repo rate and SOFR ( six month average) per annum. At present SOFR is 5.25 percent per annum. The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans which superseded the London Interbank Offered Rate (LIBOR).

Here the scheduled banks who have USD in their Nostro Accounts’ balance can easily take this benefits 110 per dollar vis-a-verse highest 90 days plus 2.75 percent interest rate annually ( Repo rate minus SOFR, 8.00-5.25=2.75 percent). On the other hand, commercial banks can take their deposited dollars into Central Bank exchanging BDT 110 per USD within specified time. But if these commercial banks want to buy this dollar from open market, they may require to buy high rate spending more BDT on the day of drought of dollars.

Only the scheduled banks who have USD in their vault and Nostro Accounts can avail these opportunities for returning per USD with BDT 110 plus 2.75 percent interest annually. The rest of the banks, who doesn’t have USD , they are availing liquidity facilities by 8 percent Repo Rate. Present Currency Swap system can mitigate the reserves pressure a little bit but it is fully contradictory with the present monetary policy.

The commercial banks are seeking BDT with the exchange of USD desperately. It has been shown that after launching currency swap system, the commercial banks have availed BDT 65.0 billion facility within three days. The impact of this BDT 65.0 billion is huge in banking sector and macro economy into multiplying which is known as money multiplier.

As of January 8, 2024 , money multiplier rate of the country was Taka 5.45. In this regard BDT 65.0 billion will generate BDT (65×5.45)= 354.25 billion. Money Multiplier as M2 money-supply balance divided by the base money or reserve money. It stood at a highest of 5.45, as compared to 5.07 at the end of June 2023. A higher value of this rate, known money multiplier which demonstrates that the banking system generates higher money supply out of the money provided by the Bangladesh Bank.

Money multiplier is a vital matter in macroeconomics which regulates the amount of money in circulation affecting interest rates. It is important in banking sector as well because it shocks monetary policy and cohesion of the banking sector. Actually, people don’t want to know the increase or decrease of reserves of the country, they desire peace with commodities by less money.

Besides, all commercial banks don’t have Nostro Accounts. Even if the balance of Nostro Accounts is little of some commercial banks which will effectuate inequal competition in banking sectors. The weak banks will be weaker. Finally, they will have to bind merge themselves with a strong or a good one. The problem doesn’t end here. Although Merger and Acquisition is a difficult process but possible. Strong banks will try to merge with weak banks by as little as possible value.

Analyst: MD. BADRUL MILLAT IBNE HANNAN, CPA (UK), CFC (IFC, Canada) currently working at Islami Bank Bangladesh PLC.