Reduce pressure on foreign reserve

According to international safety standards, there should be a reserve equal to at least three months of import expenses in normal times. If food products are to be imported then there should be at least five months’ worth of import expenses. A reserve of at least 7 months’ worth of import costs should be maintained in case of volatility in global essential commodity markets. Bangladesh currently imports large quantities of food. At the same time, there is great instability in the world commodity market around the war between Russia and Ukraine. There is a huge deficit in foreign exchange income and expenditure which is increasing every month. Considering these factors, the foreign exchange reserves of Bangladesh should be equal to seven months of import expenses.

Due to global economic instability, the country’s foreign exchange reserves will remain under pressure throughout the current financial year. Along with the current expenses, the import debt suspended during the Covid-19 period will have to be paid in this financial year. At the same time, the pressure of payment of deferred installments, as well as ongoing installments of foreign loans, will increase. This will have a negative impact on the reserves. But the relief is that the remittance flow may increase in the current financial year. Besides, the import cost will also decrease a little. The overall foreign exchange deficit will also reduce. This may increase the reserve slightly at the end of the financial year.

Analysing the report of the central bank, it was found that the reserves increased to 48 billion dollars in 2021. At that time, the import expenditure was about 5.5 billion dollars per month. As such, the reserve was equal to meeting the import expenses for about 9 months. In the last financial year, the target was to increase the reserve to 52 billion dollars. But it was not possible. At the end of the last financial year, the reserves fell to 42 billion dollars. Currently, the monthly import expenditure is more than 750 million dollars. The said reserves ($42 billion) are equivalent to cover 4.5 months of import expenses. By the end of the current financial year, the target has been set to increase the reserve to 43 billion dollars.

But after paying off the Asian Clearing Union (ACU) debt at the beginning of the current fiscal year, the reserves have fallen below $4 trillion which does not rise above 4 thousand dollars now. On the contrary, every day the reserves are decreasing due to the sale of dollars to the banks to meet the import expenses. However, the central bank expects the remittance flow to increase in the coming months. That is why the reserve will again exceed 4000 million dollars.

Import cost depends on the import volume of the product and the international market price. In recent years, the prices of products in the international market have increased sharply, and in 2020, the average import expenditure per month was 350 million dollars. In 2021, it increased to 450 to 5 billion dollars. In 2022, it further increased from 7.5 billion to 7.9 billion dollars. It has also increased the amount of reserve of three months or 7 months of import expenses. At present, the import expenditure stream should have reserves above 5000 million dollars for an average of 7 months.

In this context, 7 to 100 million dollars are being sold to commercial banks from the reserve almost every day. Still, the dollar crisis is evident in the market. It means that it is not possible to maintain reserves by meeting import expenditures. Banks are not able to open LC regularly. In this situation, there is no option to increase the remittance. Increasing export earnings is now challenging. Because the major export markets Europe and America are now suffering from the recession. As a result, exports to those countries will decrease. Meanwhile, imports are increasing. It is difficult to reduce. More cuts will have a negative impact on the economy. It is important to stop hundi in money laundering and remittance to deal with the existing crisis. Besides, low-interest long-term loans can be taken from foreign companies. Short-term borrowing should be stopped. Due to short-term loans, there will be further pressure on the reserves.

According to the report of the Central Bank, the growth in exports has been 34 and a half per cent in the last financial year which is 19 and a half per cent more than the target. The target was 14.8 per cent. This record growth in export earnings has been of great help in foreign exchange management. The central bank has hinted that the growth rate of export earnings may decrease in the current financial year because the main buyers in Bangladesh are Europe and America. Both regions are now suffering from economic recession. Inflation has risen to a 40-year high. The GDP growth rate is also decreasing. Due to this, exports may decrease.

The increase in import expenditure was targeted to be limited to 14.5 per cent. But by the end of the last year, it had increased to about 48 per cent, 34 per cent higher than the target. This is due to abnormally high prices of commodities in the international market. Because the communication system is limited during the Covid-19 period, the production and marketing of products decreased. When the economic activity picked up after the Covid-19 outbreak subsided, the demand for goods also increased. On the contrary, the supply was very less than the demand. Due to this, the price of the product has increased dramatically. When Russia invaded Ukraine on February 24, the price of goods increased. Due to this, the import cost has increased two and a half times more than the target. Import growth is estimated at 12 per cent in the current financial year.

But many people think that import costs will be higher than this as the price of all products will not decrease in the international market. The growth target for remittances last fiscal was 20 per cent. But that target was not achieved. The upside is down more than 15 per cent. In the current financial year, the growth target in this sector has been fixed at 15 per cent. The central bank believes that taking action against the hundi, increasing incentives, getting higher exchange rates and making it easier to send remittances through banking channels will increase inflows into the sector.

According to the report, the current account deficit target was $257 million in the last financial year. But at the end of the fiscal year, the deficit was 18 billion dollars which is 1543 million dollars more than the target. Mainly because the foreign exchange increases the expenditure more than the income, the deficit has increased more in this sector. This deficit is estimated at 1655 million dollars in the current financial year which is 245 million dollars less than last financial year. This means that the gap between imports and export will increase in the current financial year as well. That is, exports will decrease. On the contrary, imports will increase.

The trade deficit target for the last financial year was $2607 crore. The trade deficit is 2757 million dollars which is more than the target. In the current financial year, the target of this deficit is estimated at 2607 million dollars. The gap between export income and import expenditure will remain high in the current financial year as well. Economists have commented that the continuous increase in the current account deficit and the trade deficit is not a good sign. They think that the foreign exchange income will continue to decrease. On the contrary, the cost continues to rise. This will increase the pressure on the reserves. If this trend continues, it may get out of control at some point. That is why we must be careful now to bring balance in terms of foreign exchange income and expenditure.

The current shortfall in the total income and expenditure on the foreign exchange will reduce by the end of the current financial year. The sector was estimated to have a surplus of 5.1 billion dollars in the last financial year. But there is no surplus at the end of the year. On the other hand, the deficit is about 5 billion dollars. In the current fiscal year, this deficit may decrease to 15 million dollars.

The government has taken various steps as an early warning several months ago. For example, prioritization of project approval and expenditure, strict stance on government officials’ foreign visits, ban on buying cars, supervision of Bangladesh Bank in opening LC (Letter of Credit) on 3 million dollars for imports, and Prime Minister’s instructions to save electricity, 25 per cent reduction of electricity in government offices. , closing shopping malls after 8 pm, limiting the supply of oil to petrol pumps, avoiding physical presence in government meetings as much as possible and conducting them online, increasing regular market surveillance and TCB activities to control inflation, and bringing money changers under close supervision. Bangladesh was an exception where most of the countries in the world experienced negative growth during the Covid-19 period. There was positive growth. This is the calculation of the economy.

Bangladesh Bank works primarily focuses on controlling inflation and keeping currency exchange rates stable. The budget targets GDP and inflation at 7.5 per cent and 5.5 per cent respectively. In line with this, the broad money supply growth target (12.1 per cent) has been set relatively low. The repo rate of Bangladesh Bank has been increased by 50 points to 5.5 per cent. From this point of view, it is understood that the government is giving utmost importance to inflation control than growth. Specific targets for the recovery of Covid-19, social protection, job creation and skills development is needed.

The writer is a researcher and columnist. He can be reached at [email protected]