Continued pressure on Bangladesh’s exchange rate regime created liquidity shortages in the banking sector, sending the overnight interbank money rate to a 19-month high yesterday.

The weighted average rate in the overnight interbank money market, where banks borrow from each other on a day-to-day basis, stood at 4.65% yesterday, down from 3.52% a year ago. a month ago and 1.89% a year ago, according to central bank data. show.

The previous peak was recorded in August 2020 when the rate stood at 4.7%.

The current forex crisis facing the financial sector is mainly responsible for compressing the supply of liquidity in the banking sector. The cash crunch could worsen further this month due to the growing consumption during Ramadan and the upcoming spending spree at the center of Eid-ul-Fitr.

Additionally, demand for credit is on the rise as the economy runs at full steam, helped by a sharp drop in the number of coronavirus cases.

“But ensuring a healthy foreign exchange market will play a central role in emerging from the current crisis,” said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

Banks are buying US greenbacks massively from the central bank to settle their letters of credit (LC) amid lower-than-expected remittances and exports versus escalating import payments.

This forced the Bangladesh Bank to inject a record $3.78 billion between July 1 and March 23 to keep the taka’s exchange rate against the dollar stable.

This means that the banks have to spend more than Tk 32,500 crore to buy the dollars. One USD yields 86.20 Tk according to the current interbank rate.

As a result, a large amount of liquidity is now stored at the central bank, creating a shortage of liquidity in the financial sector.

“The overnight cash rate will rise further if the banks continue to buy the dollars from the central bank,” Rahman said.

Md Habibur Rahman, the central bank’s chief economist, says rising inflation has made matters worse as it has pushed up lending and deposit rates.

The official Consumer Price Index figure hit a 16-month high in February, due to soaring costs of essential foods ranging from staples such as rice, edible oil and vegetables to protein products.

“Some banks are now enjoying excess liquidity while others are facing a cash crisis. This has also triggered the overnight money rate,” Habibur said.

Rising demand for credit from borrowers also contributed to the upward trend in the rate.

“The demand for cash usually increases during Ramadan, and this year is no exception, which puts additional pressure on the day-to-day money market,” said Emranul Huq, managing director of Dhaka Bank.

Mirza Elias Uddin Ahmed, Managing Director of Jamuna Bank, called for curbing both rising imports and inflation to dampen money market volatility.

Between January and June, imports soared to $46.67 billion, up 46% year-on-year. Exports increased by 29% to $27.97 billion.

Ahsan H Mansur, executive director of the Bangladesh Policy Research Institute, says the instability in the day-to-day money market is a result of the prevailing crisis in the foreign exchange regime.

“The balance of payments situation is now in dire straits due to declining foreign exchange inflows.”

Remittances from migrant workers that provided a much-needed cushion to the economy at the height of the pandemic have now slowed, deepening the currency crisis at banks.

Bangladesh received $15.30 billion in remittances in the first nine months of the current fiscal year, down 21.56% from the same period a year ago.

“The central bank should depreciate the taka against the dollar to stave off the crisis,” said Mansur, also a former International Monetary Fund official.

The exchange rate now stands at Tk 86.20 per US dollar, compared to Tk 84.80 a year ago.

“If the central bank devalues ​​the local currency exchange rate to some extent, imports will decline. And domestic demand will automatically decline when imports are curbed.”

Banks have also started repaying loans taken from the central bank to implement stimulus packages. It also caused a liquidity crunch in the banking sector, Mansur said.