The main lender, the State Bank of India, has asked exporters to avoid making deals with Bangladesh in dollars and other major currencies, as it seeks to limit exposure to falling Dhaka reserves, according to an internal document and a source.
Bangladesh’s $416 billion economy struggles with rising energy and food prices as the Russia-Ukraine conflict widens its current account deficit and falling currencies force it to turn to global lenders such as the International Monetary Fund (IMF).
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“The country is facing a shortage of foreign currency due to rising import bills and the weakness of the Bangladeshi taka against the dollar in recent times,” the SBI said in an August 24 letter sent to its members. branches and seen by Reuters.
The letter and its contents have not been previously reported.
The SBI did not immediately respond to an email seeking comment.
The decision not to increase exposure to the dollar and other foreign currencies against Bangladesh stems from the current economic situation and the neighboring country’s shortage of foreign currency, the bank said in its circular.
“However, exposure to the Indian rupee (INR) and taka will continue,” he added.
Bangladesh’s foreign exchange reserves fell to $37 billion on Friday from $48 billion a year earlier, according to central bank data, which forecast imports to be covered for just five months.
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A source familiar with the matter said SBI did not want to increase its exposure to Bangladesh.
“We have approximately $500 million in exposure to Bangladesh and have made the decision not to grow it more aggressively, and perhaps even reduce it if necessary, with the news surrounding the economy,” the company added. source, who spoke on condition of anonymity. .
Bangladesh is just one of India’s financially troubled neighbors.
The island nation of Sri Lanka is in the grip of a financial crisis as its central bank reserves stand at just $1.7 billion at a time of runaway inflation and severe food and fuel shortages that have sparked protests and a change of government.
And Pakistan’s central bank reserves of $8.6 billion are enough for about a month’s worth of imports.
TRADE IN LOCAL CURRENCY
Bangladesh wants to reduce its reliance on the dollar, Trade Minister Tipu Munshi said last week, and it sees no problem trading in local currencies.
Speaking at an event in Dhaka, he was responding to a question about the growing focus on local currency trading, and added that the Ministry of Finance was looking for ways to achieve this.
However, Bangladesh’s central bank chief executive Serajul Islam told Reuters: “No such decision has been taken yet,” referring to local currency trading with India.
Last week, Bangladesh’s central bank allowed banks to transact in Chinese yuan, to enable trade with China.
Last month, ratings agency Standard & Poors affirmed its stable outlook rating for Bangladesh, saying it expected its external position to stabilize within a year.
However, the agency said it could downgrade Bangladesh’s ratings if net foreign debt or financing measures deteriorate further, as rising commodity prices and strong imports could contribute to a weaker taka. and drain foreign exchange reserves.
“Despite its moderate net debt, the Bangladesh government’s interest burden is considerable,” the agency added.
“Its foreign currency denominated debt, although mostly borrowed from multilateral and bilateral sources, is subject to currency risk.”
An Indian textile exporter, who asked not to be identified, said banks and importers in Bangladesh, however, were unwilling to trade in rupees and preferred the taka currency instead.
Furthermore, India has not yet clarified whether exports denominated in rupees will receive the same benefits as those in dollars, he said.
“The circular from SBI is very alarming because they said not to expose themselves to exports from Bangladesh,” the exporter added.
“Bangladesh is a major trading partner and if a top bank like SBI does not expose itself to it, how is trade going to grow? It will go down.”
India’s exports to Bangladesh increased by 17.5% to $4.94 billion in the April-July period, the first four months of the fiscal year to March 31 2023, while imports rose about 11% to $580.7 million, according to government data.