Call money rate is going up and up. Expensive dollar is a new trigger

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Bangladesh has opted to tighten its belt by deploying various other tools to deal with rising inflation, which hit a nine-year high of 7.56 percent in June because of the price spiral of food products and the rise in import costs.

To help banks meet the demands of surging import costs, the central bank injected more than $1 billion into the country’s banking system in July alone. In the last fiscal year, Bangladesh Bank sold a record $7.62 billion to local banks from its coffers, recent data shows.

As a result, the foreign exchange reserve stood at $39.49 billion on Jul 28, down from $46.15 billion in December last year.

The government’s borrowing from the formal banking system has soared radically in the last financial year, which has put liquidity pressure on banks.


Insiders said the liquidity crisis has grown acute because of the threefold effects of the government’s increased borrowing from the banking system, the purchases of US dollars by banks to settle import bills, and the rise in the treasury bill rate.

A rapid surge in government borrowing was observed at the end of the last fiscal year.

The amount was at Tk 647.5 billion at the end of the fiscal year, which was significantly higher than the borrowing target from the banking channel outlined by the government at the beginning of the last fiscal year, according to recently published data.

Finance Minister AHM Mustafa Kamal proposed to borrow Tk 1.06 trillion from the country’s banking system in the new fiscal year to meet the deficit. The target was 14 percent higher than the revised target in the last fiscal year’s budget.

In fiscal year 2020-2021, the government borrowed Tk 260.7 billion from the banking channel.

Such heavy borrowing has raised the credit growth to over 14 percent.

Simultaneously, Bangladesh Bank increased its policy rate by 25 basis points to curb inflation in May.

The policy rate, known as the repurchase agreement, is at 5 to 5.5 percent as of now.

In addition to the liquidity pressure, the increase in the repurchase agreement rate on loans has prompted banks to increase the purchase of US dollars in exchange for liquidity.

The dual pressure has created a unique phenomenon, which bankers have been calling ‘Liquidity Dryness’. The term is used to describe a situation where the liquidity crisis faced by banks takes an acute form.

Due to a cash crunch and to meet the increasing demand, banks have been borrowing money from the interbank money market at higher interest rates than before and changing interest rates on deposits from six to seven percent.