Bangladesh’s foreign exchange market is facing renewed pressure as the government’s expansionary fiscal policy fuels a sharp rise in import payments, increasing demand for US dollars and prompting Bangladesh Bank to temporarily suspend its dollar purchases from the market.
Economists and banking experts have cautioned that while higher public spending and imports are essential to revive economic growth after a prolonged slowdown, the resulting surge in foreign currency demand could put fresh pressure on the country’s exchange rate and foreign exchange reserves unless export earnings and remittance inflows strengthen simultaneously.
According to officials at Bangladesh Bank, government agencies have significantly increased the opening of import letters of credit (LCs) for machinery, fuel, industrial raw materials and other development-related goods under the new fiscal year’s budget implementation programme.
The increased import activity has substantially raised demand for dollars in the banking system, leading the central bank to refrain from purchasing additional foreign currency from commercial banks in order to avoid aggravating market pressures. Government Imports Gain Momentum: Bangladesh’s expansionary fiscal policy for FY2026-27 (See Page-2)
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places strong emphasis on accelerating development spending to stimulate economic recovery and investment. As implementation of public infrastructure projects gathers pace, imports of capital machinery, fuel, construction materials and other essential commodities are increasing rapidly. Every additional import shipment requires foreign currency payments, compelling commercial banks to open larger volumes of letters of credit.
Central bank officials said the growing settlement requirements for government import LCs have significantly increased banks’ demand for US dollars. If Bangladesh Bank simultaneously continues purchasing dollars from commercial banks to build reserves, liquidity in the foreign exchange market could tighten further, potentially creating upward pressure on the exchange rate. Consequently, the central bank has temporarily adopted a wait-and-see approach by refraining from buying dollars from the interbank market.
Shift in Bangladesh Bank Strategy: Following the introduction of the market-based exchange rate regime, the taka experienced continuous depreciation, prompting Bangladesh Bank to intervene in the foreign exchange market beginning on July 13 last year.
Since then, the central bank purchased dollars from commercial banks through auctions to reduce excessive market volatility and stabilize exchange rate movements.
Bangladesh Bank data show that its latest dollar purchase took place on June 4 this year, when it bought US$25 million through an auction. Since July last year, the central bank has purchased a cumulative US$6.42 billion from participating commercial banks.
However, the current market dynamics have shifted considerably. Officials noted that government import payments have accelerated while remittance inflows have shown signs of moderation in recent weeks, narrowing overall dollar liquidity in the market.
A senior Bangladesh Bank official, requesting anonymity, said the central bank is currently not considering further dollar purchases.
“Commercial banks require substantial foreign currency to settle government import LCs. Purchasing dollars from the market at this moment would intensify pressure on foreign exchange liquidity,” the official said.
Large Government LCs Increase Dollar Demand: According to Bangladesh Bank sources, government agencies opened import LCs worth more than US$2 billion during June alone. A similar volume of government import LCs is expected to be opened during July as implementation of the new national budget gains momentum. Officials fear these payments could significantly increase dollar demand over the coming weeks.
Managing Director and CEO of Mutual Trust Bank, Syed Mahbubur Rahman, said commercial banks are currently under considerable pressure to maintain sufficient dollar liquidity to meet government import obligations. “The volume of government LCs has increased significantly in recent weeks. Banks must hold adequate foreign currency to honor these commitments. Under the current circumstances, Bangladesh Bank’s decision not to purchase dollars from the market appears appropriate,” he said. He added that only a limited number of banks possess sufficient foreign currency liquidity to absorb such large payment obligations.
Remittance Slowdown Adds to Concerns: Market participants also pointed to a slight moderation in remittance inflows after record earnings in the previous fiscal year.
Although remittances remain strong by historical standards, slower inflows compared with earlier months have reduced immediate dollar availability. Combined with rising import payments, the softer remittance trend has widened demand-supply imbalances in the foreign exchange market.
Analysts say maintaining a healthy balance between imports, exports and remittances will remain critical to ensuring exchange rate stability. Balancing Growth with External Stability: The government’s fiscal expansion aims to revive investment, create employment and strengthen economic growth following a period of subdued private sector activity. Higher public expenditure naturally requires increased imports of machinery, energy products and industrial inputs. Economists note that such import growth is not inherently negative because productive imports can enhance future export capacity and economic output. However, if imports rise substantially faster than foreign exchange earnings, pressure inevitably builds on reserves and exchange rates. Bangladesh therefore faces the challenge of supporting economic recovery while preserving macroeconomic stability.
Experts Call for Coordinated Policy Measures: Dr. Enayet Karim, a globally renowned banking expert, told The Daily Industry that Bangladesh’s current foreign exchange dynamics reflect a natural consequence of expansionary fiscal policy but require careful policy coordination.
“Economic recovery requires higher investment and that inevitably increases imports. The challenge is ensuring that export earnings, remittances and foreign investment rise simultaneously to finance those imports. Otherwise, pressure on the foreign exchange market becomes unavoidable.”
Dr. Karim said Bangladesh Bank’s decision to temporarily suspend dollar purchases demonstrates prudent reserve management. “The central bank must remain flexible. Building reserves is important, but preserving market stability is equally critical. Allowing commercial banks to retain sufficient dollar liquidity for government import payments is a sensible short-term policy response.”
He also emphasized that long-term exchange rate stability depends on improving export competitiveness rather than relying solely on central bank intervention. “Sustainable foreign exchange stability cannot be achieved through intervention alone. Bangladesh needs stronger export diversification, higher foreign direct investment, greater remittance inflows through formal channels and continued confidence in macroeconomic management.”
Fiscal Expansion Must Be Accompanied by Strong External Earnings: Former Bangladesh Institute of Bank Management (BIBM) Director General Dr. Toufic Ahmed Choudhury said the central bank’s primary responsibility remains maintaining exchange rate stability. “Expansionary fiscal policy naturally increases imports. If Bangladesh Bank simultaneously absorbs dollars from the market, additional pressure could emerge. Current policy adjustments therefore appear consistent with maintaining orderly market conditions.”
Former World Bank Lead Economist Dr. Zahid Hussain told The Daily Industry that Bangladesh’s macroeconomic management now requires close coordination between fiscal and monetary authorities.
“Development spending is essential for accelerating growth, but policymakers must carefully monitor the pace of imports relative to export receipts and remittances. External sector stability should remain an important policy anchor.”
He noted that attracting additional foreign investment and strengthening export performance would help ease medium-term pressure on the balance of payments.
Weekly Dollar Requirements Continue Rising: Bangladesh Bank Executive Director Arif Hossain Khan said commercial banks are currently settling government import LCs worth more than US$600 million every week, illustrating the scale of foreign currency demand generated by public sector imports. The elevated payment requirements explain why commercial banks require larger dollar holdings than in previous months. Bankers say this trend is likely to continue as implementation of development projects accelerates during the current fiscal year.
Outlook Remains Manageable but Challenging: Despite growing dollar demand, economists believe Bangladesh’s foreign exchange situation remains manageable provided exports, remittances and external financing continue improving over the medium term.
Recent improvements in foreign exchange reserves and stronger fiscal management have enhanced market confidence compared with previous years.
Nevertheless, rising government imports under the expansionary budget are expected to keep pressure on the foreign exchange market during the coming months.
Analysts believe the central bank’s cautious approach reflects an effort to strike a delicate balance between reserve accumulation, exchange rate stability and adequate foreign currency availability for trade.
As Bangladesh pursues faster economic growth through increased public investment, policymakers will need to ensure that external sector management remains equally robust. Strengthening export competitiveness, sustaining remittance growth, attracting foreign direct investment and maintaining prudent monetary policy will be critical to preventing temporary foreign exchange pressures from evolving into broader macroeconomic risks.
For now, Bangladesh Bank’s decision to step back from dollar purchases signals a strategic shift aimed at preserving liquidity in the banking system while supporting the government’s ambitious development agenda without triggering unnecessary volatility in the foreign exchange market.
