Foreign exchange reserves held by commercial banks stood at $3.80 billion in February, according to Bangladesh Bank. At the beginning of the previous fiscal year, this figure was $6.10 billion, meaning the dollar-holding capacity of these banks has nearly halved within a short period.
The calculation of commercial bank reserves includes the debit balances of Nostro accounts and investments by Offshore Banking Units (OBU). The latest update, released on February 26, highlights the dwindling dollar holdings — a trend stakeholders view as a significant sign of economic fragility.
Imports of capital machinery for private sector growth have largely stalled as foreign banks scale back credit lines due to a poor “country rating.” With more than a dozen domestic and foreign banks in a precarious financial state, many have been effectively sidelined from the nation’s import-export trade. For this reason, commercial banks’ foreign exchange reserves are so low.
Arif Hossain Khan, executive director and spokesperson of Bangladesh Bank, explained that many import Letters of Credit (LCs) were deferred prior to the mass uprising, which previously kept Nostro account balances artificially high. Over the last one and a half years, these delayed liabilities have been settled. However, he acknowledged that foreign banks are now hesitant to provide new credit lines, primarily due to the impact of the downgraded country rating.
“While the reserves of commercial banks have decreased, their Net Open Position (NOP) remains stable,” Arif Hossain Khan told Bonik Barta. “Due to high growth in remittances, the NOP of some banks occasionally exceeded the set limits, leading the central bank to purchase dollars from the market. Once the conflict in the Middle East concludes, investment and import demand will rise, and we expect the reserves of commercial banks to improve accordingly.”
Bangladesh Bank data shows that commercial bank reserves stood at $5.53 billion at the end of FY 2022-23 and rose to over $6.10 billion by the end of FY 2023-24. However, the trend reversed in FY 2024-25, with reserves falling to $4.25 billion by June 2025. Despite a slight recovery in November, reserves have continued to decline steadily, reaching $3.80 billion by February this year.
Major international rating agencies have downgraded Bangladesh’s country credit ratings over the past few years. These include the US-based “Big Three” — Moody’s, S&P, and Fitch Ratings. These ratings are critical indicators of a nation’s economic resilience, investment climate, and international standing in foreign trade. The downgrades from these three institutions began in 2022.
Due to the deteriorating country rating and failure to meet international standards, local banks now require guarantees from banks from various countries to open Letters of Credit (LCs). Middle Eastern banks provide the majority of these guarantees for Bangladeshi LCs, while major banks in India, Europe, and the US also serve as guarantors for some transactions. Typically, a specific credit limit is approved for Bangladeshi banks to facilitate this.
However, since late 2023, foreign banks have been reducing these credit limits due to the ongoing dollar crisis. The situation grew even more precarious following the events of August 5, 2024. During that period, the dissolution of boards at 15 private banks, a severe liquidity crunch, and negative publicity prompted many foreign banks to stop accepting LCs from certain local banks. Even banks with strong financial standing have seen their credit limits reduced. Reports also indicate that local banks are being forced to pay extra commissions or fees to open LCs.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank (MTB), told Bonik Barta, “New foreign loans through offshore banking units have significantly decreased. Instead, more previous loans are being repaid. While local entrepreneurs previously sought buyers’ credit from foreign institutions, that has almost entirely stopped due to high interest rates and volatility in the dollar exchange rate. Foreign banks have also reduced credit limits for imports. All these factors have contributed to the decline in the foreign exchange reserves of commercial banks.”
In terms of “third-party guarantees” for imports, Bangladeshi banks conduct the highest volume of business with UAE-based Mashreq Bank. This influential Middle Eastern bank acts as a guarantor for the LCs of most Bangladeshi banks. Over the last two years, however, Mashreq Bank has closed credit lines for many local banks. Other banks in India, Singapore, Saudi Arabia, and the UAE have also reduced their credit limits, according to bank executives.
Among European lenders, Germany’s Commerzbank has the largest business volume with Bangladesh. This bank has also stopped accepting LCs from some local banks. Despite the overall instability, Standard Chartered Bank Bangladesh has continued to perform well, with the multinational bank’s Bangladesh office making record profits over the last three years.
Previously, Islami Bank Bangladesh PLC handled the highest volume of import-export and foreign trade transactions in the country. However, its operations have become significantly limited over the past three years. Foreign lenders, including Mashreq Bank, are no longer providing credit lines to Islami Bank. The limited operations of Islami Bank and five other Shariah-based banks currently undergoing mergers have also contributed to the overall decline in the reserves of commercial banks.
Asked about the situation, Omar Faruk Khan, managing director of Islami Bank Bangladesh, told Bonik Barta, “We’re once the leading bank in the country for foreign trade. But, controversies and irregularities in recent years damaged our relationships with many foreign banks. We’re now striving to rebuild those ties. Many foreign banks are currently not offering new credit facilities to most Bangladeshi banks. Imports, including capital machinery, also remain low.”
Meanwhile, despite the decline in dollar holdings within commercial banks, Bangladesh Bank’s reserves have increased by nearly $10 billion over the last year. In March 2025, foreign exchange reserves were $20.10 billion under the international BPM6 standard. By Monday, this figure rose to $29.36 billion. According to the central bank’s own calculations, gross reserves now exceed $34 billion. During the current fiscal year, the central bank has bought approximately $5.5 billion from the market.