The dollar reserves held by Bangladesh’s commercial banks have sharply declined by $1.72 billion over the past five months, underscoring the impact of Bangladesh Bank’s ineffective strategies amid a severe dollar crisis.

The central bank’s directives to repay substantial foreign dues within a short period, its dollar purchases to artificially inflate reserve figures, and its inadequate oversight of dollar market manipulation have collectively disrupted the forex market, driving the dollar’s exchange rate to a peak of Tk 129 from Tk 120, according to market experts.

This sharp rise in dollar prices has further inflated the cost of foreign loan repayments, compelling borrowers to allocate significantly more funds to meet their obligations in foreign currencies.

In November, the gross foreign currency balance held by commercial banks fell to $4,383 million, down from $4,615 million in October, according to Bangladesh Bank data.

This figure represents the lowest level in 44 months, since March 2021, when the balance stood at $4,344 million, the data shows.

The reserves also declined from $4,981 million in September, $5,265 million in August, $6,088 million in July, and $6,103 million in June, as revealed by central bank statistics.

Bankers reported that Bangladesh Bank Governor Ahsan H Mansur instructed banks to clear a significant portion of foreign dues by December 2024, exacerbating the dollar shortage.

The central bank should have extended the repayment timeline for some large payments to mitigate this market pressure, said M Masrur Reaz, Chairman and CEO of Policy Exchange Bangladesh.

Moreover, the central bank has reportedly ceased dollar sales to commercial banks to prevent further depletion of its foreign exchange reserves. Simultaneously, Bangladesh Bank has been purchasing dollars from the market to bolster its reserves, adding to the already significant strain on the market.

Masrur suggested that dollars be injected strategically, based on thorough market assessments, to stabilise and cool down the dollar market.

He also criticised the central bank’s instruction to purchase dollars at a rate of Tk 123 while the official rate stood at Tk 120, arguing that such measures could create market chaos and confusion.

Despite a recent rise in remittance inflows and export earnings, the dollar holdings of commercial banks have shown no significant improvement, according to bankers.

Remittance inflows during the July-November period of FY25 increased to $11.13 billion, compared to $8.8 billion during the same period of FY24.

Similarly, Bangladesh’s export earnings for the same period rose to $19.90 billion from $17.82 billion in FY24.

However, foreign direct investment has declined amid political turmoil and unrest, further compounding the country’s economic challenges.

The banking sector has been grappling with a severe dollar shortage since early 2022, sending shockwaves through the macro-economy.

Inflation, production costs, and energy prices have risen significantly during this period.

The situation deteriorated further following a political shift, as substantial foreign debt repayments accumulated, and pressure to settle these obligations intensified after the interim government was sworn in.

The burden of the dollar shortage has not been evenly distributed among banks. A handful of banks hold a significant portion of the country’s dollar reserves, while many others struggle to meet their customers’ foreign currency demands.

This shortage has strained the nation’s capacity to pay for imports and has weakened the Bangladeshi taka, with the exchange rate rising to Tk 129 from Tk 120 in the past week.

Bankers have also accused some institutions of manipulating dollar prices, citing lax monitoring by Bangladesh Bank, which has allowed certain banks to exploit the crisis for their own benefit.

The exchange rate has experienced a consistent upward trend, increasing from Tk 85.80 in December 2021 to Tk 104 in December 2022 and Tk 110 in December 2023.

Businesses warn that higher dollar rates translate to increased import costs, which, in turn, raise production expenses and consumer prices.

This could exacerbate the country’s inflation crisis, further eroding purchasing power and reducing overall consumer spending.

While the central bank expects an improvement in reserves as foreign lenders resume loan disbursements, experts caution that the crisis reveals deep-rooted vulnerabilities in Bangladesh’s banking and exchange systems.