As it seeks to reduce exposure to Dhaka’s declining reserves, leading lender State Bank of India has reportedly asked exporters to refrain from settling deals with Bangladesh in the dollar and other major currencies.
As the conflict in Russia and Ukraine widens Bangladesh’s current account deficit and its $416 billion economy struggles with rising energy and food prices, it is forced to turn to international lenders like the International Monetary Fund (IMF).
“The country is facing a shortage of foreign currency due to higher import bills and weaknesses of Bangladeshi taka against the dollar in recent times,” the SBI said in an August 24 letter sent to its branches and seen by Reuters.
The letter’s contents haven’t been previously reported, either.
There were no comments available from the SBI.
According to the bank’s circular, the current economic climate and Bangladesh’s neighbor’s shortage of foreign currency were the driving forces behind the decision not to increase exposure to the dollar and other foreign currencies concerning Bangladesh.
“However, exposure to Indian rupee (INR) and taka will continue,” it added.
According to data from the central bank, Bangladesh’s foreign exchange reserves, which only provide five months’ worth of import coverage, fell from $48 billion a year earlier to $37 billion as of Friday.
According to finance ministry representatives, Bangladesh is asking the IMF for a loan of $4.5 billion, which is more than its $1 billion allotment under the IMF Resilience and Sustainability Trust. View More
According to a source with knowledge of the situation, SBI didn’t want to increase its exposure to Bangladesh.
“We have an approximate exposure of $500 million to Bangladesh and have taken the decision not to grow it further aggressively, and maybe, even reduce it as needed, with the news surrounding the economy,” added the source, who spoke on condition of anonymity.
One of India’s neighbors is experiencing financial difficulties in Bangladesh.
With its central bank reserves at just $1.7 billion, the island nation of Sri Lanka is in the midst of a financial crisis when food and fuel shortages and galloping inflation have led to protests and a change of government. View More
Additionally, Pakistan’s $8.6 billion central bank reserves are enough to cover imports for just about a month. View More
According to Bangladesh’s commerce minister Tipu Munshi, the country wants to reduce its reliance on the dollar and does not see any issues with transacting in local currencies.
He was responding to a question about the increased attention paid to local currency trade in Dhaka when he said that the finance ministry was looking into ways to do this.
Regarding the exchange of local currencies with India, Serajul Islam, executive director of the Bangladesh central bank, told Reuters, “No such decision has been taken yet.”
The Bangladeshi central bank allowed banks to conduct transactions in Chinese yuan last week to facilitate trade with China.
Standard & Poors, a rating agency, confirmed its stable outlook rating for Bangladesh last month and predicted its external position would stabilize in a year.
The agency did warn that if net external debt or financing metrics continued to deteriorate, it might downgrade Bangladesh’s ratings because rising commodity prices and robust imports could exacerbate the taka’s depreciation and deplete foreign exchange reserves.
“Despite its moderate net debt position, the Bangladesh government’s interest burden is considerable,” the agency added.
“Its foreign currency-denominated debt, though predominantly borrowed from multilateral and bilateral sources, is subject to exchange rate risk.”
However, an Indian textile exporter who wished to remain anonymous claimed that Bangladeshi banks and importers preferred the taka currency and were unwilling to conduct business in rupees.
He added that India has not yet stated whether exports denominated in rupees will enjoy the same advantages as those denominated in dollars.
“SBI’s circular is very alarming, as they have said not to take exposure on Bangladesh exports,” the exporter added.
“Bangladesh is a major trading partner, and if a premier bank like SBI does not take exposure, how will the trade grow? It is going to go down.”
In the first four months of the fiscal year ending on March 31, 2023, India’s exports to Bangladesh increased by 17.5% to $4.94 billion, according to government data, while imports increased by about 11% to $580.7 million.