Bangladesh is facing a deepening currency crisis, caused primarily by the sharply higher cost of petroleum imports. The crisis is pushing the price of US dollar denominated letters of credit (L/Cs) up to a record high, with a rate of 69.25 Taka (Tk69.25) reported at the end of January for opening new credits.

Prices in the inter-bank foreign exchange market, however, seem to have stayed calmer, with a rate of Tk66.6 attached to transactions in the inter-bank foreign exchange market.

Trade deficit

Local bankers are calling on the government to look at new strategies for managing hard currency funds or turn to the Islamic Development Bank for support.

Meanwhile, the soaring cost of hard currency is widening Bangladesh's trade deficit. It deepened to US$739 million in July-October 2005, compared with US$696 during the same period in 2004.

Massive L/C hike

Bangladesh's commercial banks opened L/Cs worth US$582 million for petroleum imports between July and October 2005.

This approximates to a massive 28 per cent or US$129 million increase over the previous year.

State support

To keep L/Cs for petroleum products flowing, the government has asked the central bank to issue US dollar overdrafts to the help Janata and Agrani banks open L/Cs for petroleum imports.

Similar support has not been extended for Sonali Bank to open L/Cs for Bangladesh Petroleum Corporation, unless the state-run corporation repays bank debts of around US$86 million.

These three banks had been major US dollar suppliers in the inter-bank foreign exchange market, but Janata and Sonali have since become buyers and Agrani bank is now only selling limited amounts of US dollars.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.