Economy
Bangladesh Raises Dollar Bond Rates to Attract Diaspora Investments
The Finance Minister has announced an increase in interest rates for the US Dollar Premium Bond and US Dollar Investment Bond, targeting investments up to $100,000. The move is aimed at attracting funds from the Bangladeshi diaspora and foreign citizens with Bangladeshi origins to bolster the country’s dollar reserves.
As per the recent notification by the Internal Resources Division, interest rates for the premium bond are now 6.50%, 7%, and 7.50% for the 1-year, 2-year, and 3-year terms, respectively. For the investment bond, rates are set at 5.50%, 6%, and 6.50% for the same terms. Buyers can acquire these bonds from authorized dealer branches of banks within the country, Bangladeshi bank branches abroad, and exchange houses.
The finance ministry circular outlines that new investments will be calculated by adding up previous investments, with the interest rate applicable at the time of purchase. Investors can choose to receive reports of their investments in dollars or taka.
Bangladesh Bank data reveals that the net sales of the US Dollar Premium Bond were Tk1.5 crore in FY21, while the US Dollar Investment Bond had a negative net sale of Tk84 crore. During FY22, both bonds showed negative net sales at Tk103 crore and Tk876 crore, respectively. In the July-October period of FY24, the net sales were negative at Tk11 crore and Tk86 crore for the Premium and Investment Bonds, respectively.
Tarek Mohammad Zakaria from the Internal Resources Division explains that the global trend of increasing interest rates, observed in countries like the United States, the United Kingdom, and Europe, has prompted Bangladesh to adjust its rates to attract investment. This move is also aligned with the government’s aim to provide additional benefits to expatriate Bangladeshis.
The Bangladesh Bank had proposed a 2% increase in interest rates on all three bonds, in line with international markets. An expatriate investor mentioned that Bangladesh, contrary to global trends, offered lower rates, contributing to a wider financial account deficit. The investor highlighted that the government’s insufficient marketing efforts and lack of public awareness led to lower-than-expected investments in these bonds.
Despite the potential of the diaspora bonds to alleviate the dollar crisis by encouraging remittances through official channels, inadequate promotion has resulted in less than $1 billion outstanding investment in all three government-issued bonds for non-resident Bangladeshis at the end of FY23, compared to nearly $3 billion in FY22, according to Bangladesh Bank data.
The Bangladesh Bank has adjusted the dollar price to Tk117 from Tk110 by introducing the crawling peg exchange rate mechanism.
Under this new approach, the bank will buy and sell dollars with Tk117 as the mid rate.
This decision was reached during a meeting of the monetary policy committee on Wednesday, May 8th.
Additionally, the committee has opted to discontinue the SMART lending rate mechanism, allowing banks to set their lending rates based on dollar demand and supply, according to a circular issued after the meeting.
The crawling peg system permits a currency with a fixed exchange rate to fluctuate within a specified band of rates, combining features of both fixed and floating exchange rate regimes.
On May 5th, Bangladesh Bank Governor Abdur Rouf Talukder announced the adoption of a market-based interest rate and the implementation of a crawling peg system to stabilize the foreign exchange rate.
He stated that the central bank is collaborating with prominent economists and bankers to devise a contractionary monetary policy aimed at curbing inflation and restoring macroeconomic stability.
Earlier, on April 2nd, the World Bank stressed the importance of a crawling peg mechanism aligned with market-clearing exchange rates to narrow the gap between formal and informal exchange rates, as outlined in the latest Bangladesh Development Update report.
Meanwhile, the International Monetary Fund (IMF) has advocated for a market-based dollar rate. In January 2023, the IMF attached several conditions to a $4.7 billion loan facility over a three-and-a-half-year period. Bangladesh has received two installments of the loan by fulfilling nearly all conditions, except for the reserve requirement.
The International Monetary Fund has finally given Bangladesh the green signal for $681 million as the third instalment of the lender’s $4.7 billion loan package.
The visiting delegation of the lender has confirmed that the instalment will be released in June, several top finance ministry officials told the news reporter following a meeting with the IMF team yesterday.
They said various aspects of an agreement for securing the third instalment were finalised in a series of meetings with the IMF and different wings of the finance ministry yesterday.
The lender is likely to reduce the requirement for June’s net foreign exchange reserve from $20.10 billion to $17-$18 billion, they added.
The IMF had a condition for Bangladesh to have reserves of $19.26 billion by March-end and $20.10 billion by June’s end for the third instalment.
An official from the finance division told the news reporter that despite current reserves now around $15 billion, receiving the third instalment is assured even if this condition is not met.
Bangladesh and the IMF do not have much disagreement on most issues, said the official, adding that the government is working to implement the conditions imposed by the IMF including reducing subsidies, increasing revenue and reserves.
He said a new reserves requirement will be finalised in a meeting with the central bank on Tuesday. The IMF will also determine the net reserve target for October and December for the fourth instalment.
Bangladesh also failed to meet the net reserve requirement and revenue target before receiving the second instalment. Back then, the IMF signed the MoU by reducing the targets for next March and June.
Another official said the government also has doubts about achieving the lender’s condition for revenue target for June.
“Therefore, the finance ministry has also sought concessions from the IMF’s targets for June revenue collection. In the new MoU, the IMF is also likely to make concessions in this regard,” said the official.
The government has collected Tk1,62,164 crore against the revised target of Tk1,43,640 crore till last December, according to the finance ministry. However, revenue of Tk3,94,530 crore has to be collected at the end of the financial year.
Assessing revenue collection growth over the current fiscal year’s nine months, the revenue board predicts falling short of the target by at least Tk10,000 crore by June’s end.
Govt actively following IMF’s directives
Ahsan H Mansur, executive director of the Policy Research Institute, told the news reporter that the IMF’s current focus includes transitioning to a market-based exchange rate, leaving interest rates to the market, enhancing revenue collection, and reducing government subsidies.
He said the government is actively aligning policies with the IMF’s directives.
“The IMF may reduce the June net reserve requirement from $20.10 billion to $17-$18 billion. But it will be difficult to achieve before June,” said the economist.
Ramifications of not meeting conditions
Mahbub Ahmed, former senior secretary of the Finance Division, told the new reporter that the government is working to meet IMF conditions to secure the third loan instalment.
He said, “Despite not meeting conditions on foreign exchange reserves or revenue, we remain optimistic about receiving the third tranche.”
He said failing to meet the conditions satisfactorily may hinder receiving the two instalments scheduled for the next fiscal year.
“As the government has until the next fiscal year to fulfil the conditions, the IMF may get strict for the next instalments,” said the former secretary.
He further mentioned that Bangladesh has never received the last instalment of the IMF loan except once due to not being able to fulfil the conditions.
“In 2016, when I was finance secretary, I received the last instalment of the IMF’s $1 billion loan. Before this, Bangladesh could never take the final instalment of the loan,” he added.
Meeting with BB today
The IMF officials will meet with central bank officials on Tuesday morning to adjust banking sector conditions for securing the third and fourth loan instalments.
Later in the day, they will finalise the MoU with State Minister for Finance Waseqa Ayesha Khan and Finance Division Secretary Khairuzzaman Mozumder, attaching the revised terms for releasing the instalments.
The delegation, led by Chris Papageorgiou, head of IMF’s Development Macroeconomics Division, will leave Dhaka after a press briefing on 8 May. The team arrived on 24 April to review the loan programme.
In January last year, Bangladesh signed a $4.7 billion loan agreement with the IMF due to dwindling foreign exchange reserves. The loan is being distributed in seven instalments by 2026. The lender cleared $447.8 million of the first instalment in February last year, and $681 million of the second instalment in December
Bangladesh and Egypt have affirmed their commitment to enhancing bilateral cooperation through regular foreign office consultations.
During a meeting between Foreign Minister Hasan Mahmud and Egyptian Foreign Minister Sameh Hassan Shoukry on Saturday afternoon, held on the sidelines of the 15th Organisation of Islamic Cooperation (OIC) Summit in Gambia, discussions were held on various matters of mutual interest. These included boosting trade and investment between the two nations and addressing the Rohingya crisis.
Foreign Minister Hasan Mahmud proposed mutual visa exemption and expanding trade with Egypt during the meeting. The Egyptian foreign minister agreed in principle to sign an agreement on diplomatic and official visa exemption.
Additionally, the Egyptian foreign minister pledged full support for the construction of the Chancery building of the Bangladesh mission in Egypt.
Following this, Deemah Al Yahya, Secretary General of the Digital Cooperation Organization (DCO), paid a courtesy call to Foreign Minister Dr Hasan Mahmud.
During the meeting, Al Yahya informed the Foreign Minister about the drafting of an agreement titled ‘Multilateral AI Agreement’ on the International Use of Artificial Intelligence by the member states of DCO.
Expressing sincere interest, Al Yahya accepted the invitation from the Foreign Minister to visit Bangladesh and witness the country’s progress in the field of information and communication technology. He expressed hope for expanding DCO’s cooperation with Bangladesh in this sector through the visit.
