Reasons behind Bangladesh’s dollar crisis

Bangladesh Bank (BB) has shifted its policy by significantly reducing foreign currency sales to commercial banks in an effort to protect the country’s fast-depleting forex reserves. In FY24, BB sold $12.80 billion to banks while buying only $3.38 billion, with average monthly net dollar sales around $800 million.

Mutual trade among South Asian Association for Regional Cooperation (SAARC) countries accounts for a mere 5% of their total trade, according to a special report by the Bangladesh Bank. The report suggests that trading in local currencies could enhance intra-regional trade, but significant reforms are necessary to achieve this. Following the Russia-Ukraine conflict, the rising exchange rates of the US dollar have created challenges for import-dependent countries, including Bangladesh, which has had to limit imports due to declining foreign currency reserves.

Bangladesh's interbank forex market is recovering after a prolonged crisis, driven by a surge in remittance inflows and key central bank interventions. The market, crucial for international trade, had struggled due to high import bills, falling remittances, and dwindling reserves. 

Bangladesh's foreign exchange reserves stood at $19.38 billion on September 18, down from $20.8 billion on September 8, following a $1.37 billion payment to the Asian Clearing Union (ACU) for July-August imports. This decline also reflects payments for other obligations and the central bank's strategy to source dollars from the interbank market for essential imports like energy and fertilisers.

The price of the US dollar in Bangladesh's open market has decreased due to an increase in supply surpassing demand. Currently, the dollar is being sold for Tk 121 to Tk 122, down from Tk 125 three weeks ago. This decline in exchange rate follows political changes in the country on August 5, which led to a reduction in foreign travel demand and an increased flow of dollars into the market. Typically, travelers purchase foreign currency from the open market, and with their demand waning, the dollar's price has also trended downward.

Bangladesh cleared a $1.37 billion import bill with the Asian Clearing Union (ACU) last Monday, covering imports for July and August.

As a result, the country's foreign exchange reserves have fallen to $19.44 billion, using the IMF's BPM6 calculation method. Prior to this, on August 29, the reserves stood at $20.54 billion. 

According to the central bank's co