How long will forex crisis linger?

The lingering shortage of forex reserves – which became more and more apparent for the last couple of months – shows no sign of recovery despite the Bangladesh Bank launching a series of initiatives aimed at tackling this crisis.

Recently, on different occasions, Finance Minister AHM Mustafa Kamal and Bangladesh Bank Governor Abdur Rouf Talukder had voiced optimism that the forex shortage will end soon, but reality does not reflect this notion.

The central bank on September 13 allowed a floating exchange rate for USD to reduce pressure on forex reserves, but the fall continues, hitting $36.85 billion on Thursday. The usable reserves are even lower than the figure – only $29 billion, according to regulator data.

Moreover, the Bangladesh Bank pumped over $3 billion into banks from its reserves in the two and half month of FY23, and insiders say this support will continue in the coming days. This further indicates that the existing pressure on forex reserves is not going away anytime soon.

Despite the regulator’s continuous USD support, Taka devalued by 25.87 per cent against the USD between January and September 22. Under such circumstances, the question on everyone’s mind is how much longer the country will have to face the forex crisis?

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said, “It is right that the import payments have dropped slightly, but this does not indicate that the forex crisis will end soon.”

The Letter of credit (LC) settlements for imports were $5.93 billion in August – a 20 per cent decline compared to July, show central bank data.

Mansur continued, “There are two ways to counter the forex crisis. One is allowing floating exchange rate, and another is the withdrawal of interest rate cap.

The banking regulator already allowed the floating exchange rate, but yet to take any decision about interest caps.

“The central bank’s decision to not withdraw the interest rate cap means that the local currency will remain cheap. Bangladesh will not be able to end the forex crisis quickly if it decides to keep the local currency cheap.”

Pointing out that Bangladesh’s current account balance is still negative at $321 million, Mansur said, “A huge amount of foreign currency leaves the country because an increasing number of people are going abroad for education and medical purposes.

“There is no sign that the forex crisis will end soon, as the export earnings will not increase due to the destination countries facing a multitude of issues, including economic crisis and impacts of the Russia-Ukraine war.”

The forex reserves stood at $36.85 billion on September 21, down from $46.32 billion posted during the same period last year. The usable forex reserves stand at $28.85 billion, because around $8 billion have been invested – including $7 billion in the Export Development Fund (EDF).

As per the central bank officials, Long Term Fund (LTF) and Green Transformation Fund (GTF) have been formed with the remaining $1 billion. Crisis-hit Sri Lanka also took at $200 million as loans from the Bangladesh reserves, said the central bank officials.

Zahid Hussain, former lead economist of the World Bank Dhaka Office, said, “The forex crisis will not end anytime soon. If the average import costs hit $7 billion per month, then the import cost of three months will be $21 billion.

“The usable forex reserve of Bangladesh is now at $28.85 billion, which clearly indicates that we are still in a crisis. The country’s overall balance remains negative. The overall decline of export orders is also a matter of concern.” He added that the high growth of imports had begun to drop in July and August this year, while remittance inflow is also going up, which are positive developments.

BB measures to ease crisis

The government and the Bangladesh Bank have introduced several policy changes in a bid to ease the pressure on the country’s foreign exchange reserves.

The government in August increased the duty and taxes on 300 non-essential and luxury items such as SUVs, mobile phones and home appliances.

Before that move, the banking regulator in July asked banks to report about all types of foreign exchange transactions, including those of offshore banking operations. On May 10 of this year, the central bank toughened its rules for luxury item imports. A day later, the government decided to stop foreign trips of its officials and postponed the implementation of less important projects that require imports.