Bangladesh Bank is set to give loans to local banks’ offshore banking units (OBU) to offset the negative returns that it now gets for its liquid euro assets — a move that can be viewed as making the best out of a bad situation.
Interest rates went negative in the eurozone in June 2014 and the European Central Bank is widely expected to lower the negative interest rates even further today.
At present, the Euro Interbank Offered Rate (Euribor) ranges from -0.358 percent to -0.452 percent.
Meanwhile, OBUs of domestic banks have borrowed from banks in the eurozone at 2-5 percent interest rate, and the interest payments are counted as outflows of foreign exchange from Bangladesh.
As of June, €412 million has been borrowed by local banks’ OBUs from the eurozone, according to data from the Bangladesh Bank.
Subsequently, directors of the BB have decided to lend to the local banks’ OBUs from the portion of its reserves it would invest in Euribor-linked products.
A guideline will now be chalked out to execute the plan.
Banks are borrowing at 5-6 percent from the eurozone whereas the market rate is negative, he said. The central bank would lend to the OBUs at lesser interest rates, so importers would be benefitted.
However, following such measure would amount to reducing official foreign exchange reserves. Official reserve assets normally consist of liquid or easily marketable foreign currency assets that are under the effective control of, and readily available to, the monetary authority.
Though, this will not have been a concern were there excess foreign exchange reserves. As of September 4, foreign exchange reserves stood at $32.80 billion, enough to cover about five-and-a-half months’ import bill, according to data from the central bank.
Given that the BB intervenes in the foreign exchange market to keep the exchange rate relatively stable against the US dollar, assessment by the International Monetary Fund suggests an adequacy ranging from 3 to 8.8 months of imports given the country-specific characteristics of Bangladesh.
