Home ›› 25 Aug 2022 ›› Front
Bangladesh – in light of the ongoing USD shortage – can adopt a number of practical and effective initiatives to increase foreign exchange reserves, mainly by boosting remittance inflow with better incentives, focusing on export earnings repatriation, and raising interest rates.
Making recommendations for averting this ongoing financial crisis, a number of experts point out that it is crucial for the country to raise the interest cap to help prevent an increase in capital flight and halt the steady decline in forex reserves.
Bangladesh’s foreign exchange reserves hit an all-time high at $48.06 billion in August 2021, which gradually declined to $39.54 billion on 16 August this year.
New expatriates can boost remittance
Amid the global Covid-19 outbreak, Bangladesh’s manpower exports dropped by 69 per cent to 2,17,669 in 2020 when compared year-on-year. As the pandemic restrictions eased and economic activities rebounded worldwide, Bangladesh’s labour market started booming.
Data from the Bureau of Manpower Employment and Training (BMET) show that the country’s manpower exports rose by 184 per cent to 6,17,209 in 2021 compared to 2020.
This upward trend continues till date, evident by the fact that in just the first seven months (Jan-July) of 2022, Bangladesh’s manpower exports managed to reach 6,91,017 – higher than the figure recorded during the entire 2021.
Though new migrant workers are already sending remittance to Bangladesh, the government can introduce better policy support and boost the amount of cash incentive, so that the expats are encouraged to send more money home using the legal channel, experts say.
Prof Tasneem Siddiqui, founding chair of Refugee and Migratory Movements Research (RMMRU) said, “An opportunity to increase remittance inflow is waiting for us even in the midst of a crisis.
“To cash in on this opportunity, the government should increase the incentive on remittance from 2.5 per cent to 5 per cent.”
The Bangladesh government had increased the incentive rate on remittance from 2 per cent to 2.5 per cent in January this year, and also relaxed the rules in May to obtain the incentives against remittance income.
Bangladesh’s expatriates do not need to submit any paper for availing incentives on less than $5,000 or Tk 500,000.
Economist Zahid Hussain added, “As the country’s manpower exports are increasing, the remittance inflow will increase as well. But if this income does not come through the banking channel, it will not help boost our forex reserves.
“Aside from further incentivising remittance inflow through legal channels, the government should also launch initiatives to reduce the huge gap in USD rates between the kerb market and inter-bank transactions.”
Experts also recommended reducing the cost of migration to make it easier for Bangladeshis to work abroad.
It should be noted that the economy of some of the major manpower export destination countries – such as Malaysia, and oil exporting Middle East nations Saudi Arabia and United Arab Emirates (UAE) – are currently not in crisis due to soaring petroleum prices they supply in the global market.
The real GDP of Saudi Arabia has increased 9.6 per cent, UAE 8.2 per cent during the first quarter of 2022 compared to the previous year. Besides, Malaysia recorded a GDP growth of 8.9 per cent in the second quarter of 2022 year-on-year.
Experts say the economic tailwind posted by these nations will help Bangladesh export more manpower there, which in turn will increase remittance earnings significantly.
“The government needs to reduce the migration cost of workers to increase manpower exports and remittance income. This will help the country tackle the USD shortage more effectively,” suggested Prof Tasneem.
Bangladesh’s remittance earnings reached $12.89 billion in the first seven months (January-July) of this year, which was around 6 per cent lower than the same period previous year.
However, in July this year, these earnings hit $2.09 billion, which was higher than the previous 13 months.
The country’s earnings in the first seven months of this year were 22.5 per cent higher than the pre-pandemic year 2019.
Remittance earnings were $1.26 billion between August 1 and 17, which was around 15 per cent higher than the same period previous year.
Repatriation of export earnings
Another opportunity for the government to increase its forex reserves is to focus on bringing back export earnings, experts say.
Between FY13 and FY22, Bangladesh received $314 billion against exports worth $359 billion, data from the Bangladesh Bank and Export Promotion Bureau (EPB). This indicates that the country is yet to repatriate $45 billion or 12.48 per cent of the export earnings during that decade.
In this context, Zahid Hussain said, “The entirety of the export earnings was not fully repatriated due to a number of reasons. Now that the country is now grappling with a shortage of USD, we must look into the reasons behind this gap.
“If the money is stuck somewhere, we should launch an initiative to bring the export earnings back.”
Experts further said the country’s exports are not likely to be affected much by the on-going economic crisis in Europe and America.
Providing more details about the projection, they point out that almost all of Bangladesh’s main export items are cheap apparels, and due to the economic crisis, consumers in those countries will shift from higher-priced to lower-priced clothing items.
“I think Bangladesh’s exports will not face a serious loss due to the ongoing economic crisis. But if the crisis becomes a prolonged one, our export earnings will likely suffer a big fall,” said economist Zahid Hossain.
Interest rates should be increased
Experts say if the government plans to utilise the above-mentioned opportunities in a bid to boost the inflow of USD, the interest rates should also be increased.
The government fixed the banks’ loan interest rate at 9 per cent in April 2020, due to businesses demanding a reduction in the cost of investments.
The banks’ deposit rate was fixed at 6 per cent. But it was changed later, and the central bank directed that the rate would be higher than the inflation rate.
At present, savers are unable to earn any income by keeping money in the bank. Moreover, the value of the money currently deposited is decreasing as the real interest rate becomes negative.
The average interest rate on deposits this June was 3.97 per cent and the average inflation rate was 7.56 per cent. The figures indicate that the real interest rate was negative 3.59 per cent that month.
Experts have voiced concerns that if the interest rate is not increased, money laundering from Bangladesh may go up, which in turn will intensify the ongoing shortage of USD.
“The nature of money is going where it grows. The government must engage in proper macroeconomic management. There will be no benefits to withholding the interest rate cap. It should be flexible,” said economist Zahid Hussain.
The central bank governor recently said there are no plans to lift this cap anytime soon. Besides, most of the banks are not following the central bank directive for adjusting the deposit interest rate with inflation.
In addition, economists recommended keeping the initiatives taken by the government to restrict imports to save USD.
“Such restrictions should be kept in place as this is a time of emergency. But it is not right to do it for a long time, as it will hurt the relevant industries,” said Ahsan H Mansur, the executive director of Policy Research Institute (PRI).
He also recommended reducing the gap between official and actual rate of USD, and stated that there is no need to further devalue Taka against the USD.
The official rate (inter-bank exchange rate) of USD is now Tk 95, but banks are selling the greenback to importers for more than Tk 100, and open market (also known as kerb market) rate is near Tk 110.
