Turmoil upsets forex market

The drawn-out political turmoil has started to bear down on the foreign exchange market, compelling the central bank to buck its dollar-selling spree and start purchasing instead to keep the exchange rate stable.

So far this year, Bangladesh Bank has purchased $330 million from the open market, in contrast to the $357 million sold in the last two months of 2014 in the face of high demand for foreign currency.

Subsequently, the average dollar-taka exchange rate has remained stable at Tk 77.8 since January 27.

“Just as the investment demand was picking up towards the end of last year, the re-emergence of political turmoil from the beginning of the new year has totally spoiled the appetite,” said the treasury head of a private bank preferring not to be named.

The rising demand for dollars in the last two months of 2014 can be attributed to the return for investment appetite then, he added.

Since the turn of the year, which coincided with the political upheaval, the number of letters of credit opened for capital machinery and raw materials has dropped sharply, said another treasury head.

Not only that, the number of LCs opened for importing other goods too has slumped. The countrywide blockades and hartals, ongoing since January 6, have been hampering transportation, spiralling ferrying costs and consequently increasing the overall cost for imports, he said.

Subsequently, the demand for imported goods has dropped.

January’s non-food inflation figures also support this view. Non-food inflation dropped to 6.01 percent last month, after rising for three consecutive months.

Kazi Saidur Rahman, a general manager of the BB, differed with the bank officials’ views, saying it was just a seasonal effect.

Typically, at the beginning of the year, the demand for imports is low, he said. “If it is because of the political turmoil, we will know two to three months from now and not at this moment.”

The central bank in its Monetary Policy Statement reassured that it would intervene in the forex market to keep the exchange rate stable and quell inflationary pressure.