Dollar Disappears from Kerb Market

Obtaining cash dollars through banks and authorized currency exchange agents has become increasingly challenging recently. As a result, the informal currency exchange market, often referred to as the "kerb market," has experienced an unprecedented surge in demand. The exchange rate for the US dollar in this market has reached a staggering Tk120, causing significant distress among traders.

Efforts made by the Bangladesh Bank and various law enforcement agencies to stabilize the exchange rate have had the unintended consequence of slowing down formal currency exchange transactions. Many exchange offices are now dealing primarily with buyers who are willing to accept their offered rates.

Consequently, the pressure on the exchange market has shifted towards card transactions. This is evident from the rising number of card transactions, higher transaction values, and a substantial increase in the issuance of new cards over the past year, according to data from the Bangladesh Bank.

In July, card transactions reached an all-time high, surpassing 9.65 lakh transactions, with a corresponding record monthly transaction value of Tk769 crore. This represents a significant increase from the 7.61 lakh transactions valued at Tk543 crore in June, indicating nearly a 50% surge compared to the previous year.

The head of the card division at one bank disclosed that approximately 70% of dollar transactions are now conducted using credit cards, with the remaining 30% handled through debit cards.

Additionally, the head of the card department at another bank mentioned that credit card issuance is subject to several conditions. As a result, they issue prepaid cards to new customers seeking to acquire US dollars.

According to data from the central bank, the issuance of prepaid cards increased by 133% until June, with 42.69 lakh prepaid cards issued, including 24 lakh in the past year alone. Credit card issuance also saw a 13% rise over the same period.

Syed Mahbubur Rahman, the managing director and CEO of Mutual Trust Bank, highlighted a significant reduction in the inflow of physical US dollars into banks compared to previous times. He noted that individuals who used to sell their dollars to banks upon returning from abroad are now retaining their dollars in anticipation of further appreciation in value.

This shift in behavior, coupled with the growing demand for US dollars, is creating challenges for banks to meet customers' requirements for cash dollars.

Just a month ago, the kerb market offered US dollars at Tk112-112.50. However, in the past two weeks, prices have steadily risen to Tk118-120.

A reporter from a prominent Bangladeshi newspaper discovered during visits to several exchange houses that sellers were not openly advertising the current exchange rates. Instead, most were willing to source dollars from other locations for customers at higher rates.

Last week, the reporter contacted a money changer in Dilkusha who initially claimed to have no dollars available but eventually offered dollars at a rate of Tk118 when pressed. The transaction, however, was requested to take place outside their office premises.

Helal Uddin Sikder, the secretary-general of the Money Changers' Association, explained that banks are currently selling cash dollars at significantly higher prices, which is contributing to the overall increase in the dollar's value. However, he noted that the price of cash dollars had decreased on a recent Tuesday.

He emphasized that the demand for cash dollars far exceeds the supply, leading to elevated rates in the currency exchange market. He also pointed out that some banks were selling cash dollars at rates higher than those posted on their websites, which is causing frustration among currency exchange agents. According to him, it's reasonable for exchange rates to be slightly higher in the open market compared to banks, especially considering that the central bank had allowed them to sell dollars at a premium of Tk1.50 over the official bank rate.

Cash-Dollar Crisis in Banks

According to data provided by the Bangladesh Foreign Exchange Dealers' Association (Bafeda) last Thursday, physical US dollars are being exchanged at an average rate of Tk 111, with the highest rate reaching Tk 113 per dollar. However, obtaining US dollars from banks has become increasingly difficult, as reported by customers.

A prominent newspaper reached out to at least six banks over the past two weeks, and five of them stated that they did not have any physical US dollars available. 

One of these banks did claim to have some cash dollars in stock but mentioned that they were only making them available to their bank customers under specific conditions. An official from this bank explained that they prioritize students heading abroad for education who require US dollars to pay their tuition fees. "We always strive to assist them," he added. Additionally, some individuals receive US dollars based on their existing banking relationships. 

The official further clarified, "While we do have several Authorized Dealer (AD) branches, not all of them are currently handling US dollars. Presently, only 2-3 of our branches are actively selling cash dollars."

Have Bafeda, ABB Failed?

Dr. Birupaksha Paul, the former chief economist of the Bangladesh Bank, has raised concerns regarding the assertion that the exchange rate is market-based. He argues that it is not entirely driven by market dynamics; instead, it is influenced by groups such as Bafeda and the Association of Bankers, Bangladesh (ABB). He questions the legitimacy of Bafeda and ABB in determining exchange rates, stating, "Are Bafeda and ABB genuine market indicators? Certainly not."

Currently a professor of economics at the State University of New York at Cortland in the United States, Dr. Paul draws a telling analogy, likening the situation to an absence of true market forces, resembling the controlled economic environment found in North Korea.

Furthermore, he highlights a significant disparity between policy declarations and their actual implementation, characterizing it as "policy hypocrisy." Dr. Paul underscores that despite authorities' claims of adopting a market-based approach, it is not effectively put into practice.

He asserts, "The Bangladesh Bank has been adversely affected by this inconsistency and will continue to face challenges. It should adjust the exchange rate in accordance with the real market conditions. Nonetheless, some hundi transactions may persist due to factors like convenience, speed, and the avoidance of bureaucratic complications."

Law Enforcement Actions Reveal Grey Markets

The National Security Intelligence Service (NSI), Bangladesh Financial Intelligence Unit (BFIU), Bangladesh Bank, and Criminal Investigation Department (CID) launched a joint operation on August 30th to reduce the cost of cash dollars in the open market. During the operation, they seized approximately 170,000 US dollars, 30,000 Canadian dollars, and 3.8 million taka. Additionally, they apprehended several individuals involved in hundi businesses.

On the same day, Bangladesh Bank carried out a special inspection and suspended the licenses of eight money changers. Ten organizations were also asked to explain irregularities in their dollar trading activities. These money changers were accused of selling dollars at higher rates compared to the money changers' association, providing false reports to the central bank, and failing to report their activities regularly.

A separate joint operation was conducted to investigate irregularities in five money changers in the Adamji Court area in Motijheel on the same day. However, these law enforcement actions have had a chilling effect on the owners and employees of money changers.

Leaders of the money changer association met with Bangladesh Bank officials on Sunday and requested a reconsideration of the suspension decision for the eight money changers. The central bank advised the money changers to follow the established rules for seeking reconsideration.

Regarding the impact of the joint operation on the cash dollar market, Bangladesh Bank Spokesperson and Executive Director Md Mezbaul Haque mentioned that the market has somewhat normalized. He noted that both buying and selling activities in the cash dollar market have decreased. However, he acknowledged that it might take some time for the market to fully return to normal. Regarding the complaints against money changers, he stated that they were being monitored because they were selling dollars at unusually high prices, and they must conduct their business within the bounds of the law.

Reasons Behind Increase in Cash-Dollar Demand

As per experts within the industry, there is typically a rise in the desire for cash dollars during festive occasions like Eid, Puja, and Hajj, as well as at the beginning of foreign university semesters. These factors are the key drivers behind the current upswing in demand for the dollar.

Additionally, some individuals are opting to convert their savings into cash dollars rather than depositing them in banks due to the persistently low interest rates. The continuously increasing value of the dollar offers them the prospect of substantial profits. Nevertheless, this has led to a shortage of cash dollars within the banking system.