Should Bangladesh be worried about its forex reserve condition?

Recently Bangladesh Petroleum Corporation (BPC) has increased the fuel price by 50 per cent on average per cent. The process of fuel price increase in Bangladesh is that the BPC has to propose firstly for the increase of price to the Energy Regulatory Commission (ERC). The ERC has to arrange a public hearing. Then the price would be fixed through a public hearing. 

According to the Bangladesh Energy Regulatory Commission Act-2003, section 34 (1) of the BERC Act, notwithstanding anything contained in any other law for the time being in force, the price of power generation in wholesale, bulk and retail, and the supply of energy at the level of end-user, shall be determined in accordance with the policy and methodology made by the commission in consultation with the government.

Section 34 (4) further states that the commission shall "determine tariff after giving hearing to licensees and others who have interest in it". The punishment for violating the law as per Section 42 includes three years' imprisonment or a fine of Tk 5,000.

Now the question is the hiking of fuel price absolutely necessary? In the last seven years, the Bangladesh Petroleum Corporation (BPC) made a huge profit without any price cut though fuel prices fell in the international market.

The authorities are making fuel gains from two sides. They are collecting 30%-32 per cent duty on fuel oil. Besides, the BPC profited for a long time as it did not lower the prices despite the global market fall.

What is the process of the increase in fuel price Bangladesh follows? 

According to GlobalPetrolPrices.com, there are three types of processes of fixing fuel price-

1. Market-determined retail fuel prices

This pricing type is typical for liberalized fuel markets. In countries with such markets the state intervention is limited to establishing terms and conditions that promote market transparency and free competition. Fuel retailers set their selling prices freely without major restrictions. Therefore, the fuel prices at different stations and in different regions of the country could vary.

2. Price ceiling

Under this form of price regulation, fuel retailers are also free to determine their selling prices as long as they do not exceed the specified ceiling. The government influences retail fuel prices by setting maximum prices for petroleum products, which are revised regularly. The purpose of this form of price control is to protect consumers from sudden upward price fluctuations or unreasonably high market prices.

3. Fixed price

The most extreme form of price control is when the government or another authorized institution fixes the retail fuel prices. All retailers must sell their fuels at exactly these prices and what is the price is in the international market but the price of fuel in the country is constant. 

But it is a matter of concern that Bangladesh follows the last one. Fuel price is not today’s topic but there is a relationship between Inflation and the Economic Growth of a country. 

An increase in inflation means that prices have risen. With an increase in inflation, there is a decline in the purchasing power of money, which reduces consumption and therefore GDP decreases. High inflation can make investments less desirable since it creates uncertainty for the future and it can also affect the balance of payments because exports become more expensive. As a result, GDP decreases further. So, it appears that GDP is negatively related to inflation. However, there are studies indicating that there may also be a positive relationship. The Phillips curve, for example, shows that high inflation is consistent with low rates of unemployment, implying that there is a positive impact on economic growth.

At present, Bangladesh's economy is projected to grow 6.9 per cent in the fiscal year 2022-23 according to the World Bank (WB). 

In our country, the World Bank’s projection of Economic Growth Rate is lower than the projection of the Bangladesh Bank and Economists of the country. 

Forrest Cookson who is a consultant for the Bangladesh Bureau of Statistics, stated his assumption for the fiscal year of 20021/2022, 2022/20223, 2023/2024 of Balance of Payment with 7 per cent growth.

Cookson is also known as a well-wisher of the government. His assumption is more reliable. But it is a matter of concern that Bangladesh may face a severe Foreign Currency Reserve shortage in the year of 2023 and 2024. 

Let’s analyze Cookson’s article, where he showed two table- Table 1C-

Balance of Payment with 7billion US dollar)

Let’s analyze the Cookson’s article, where he showed the table

From the table, we see that the Exports was USD 46.8b and Imports was USD 65.7b in 2018/2019. Here we see that Imports was 28.77% more than Exports. In 2019/2020 Exports was 45.6b USD and Imports was 71.0b USD. In this year Imports was 35.77 % more than Exports. In 2021/2022 Imports was higher than 35.11% and it would be 37.97 % and 37.93% higher than the Exports in FY 2022/2023 and 2023/2024 respectively.

Here Primary Income means- Income receipts refer to employee compensation paid to resident workers working abroad and investment income (receipts on direct investment, portfolio investment, other investments, and receipts on reserve assets). Income derived from the use of intangible assets is excluded. From the FY 2018/2019 to 2023/2024 is always negative. Here negative Primary Income means we get the remittance from our respected expatriates less but the foreigners who work in our Country send a remittance from our country through legal banking channels more. 

Secondary Income means- Net current transfers are recorded in the balance of payments whenever an economy provides or receives goods, services, income, or financial items without a quid pro quo. All transfers not considered to be capital are current. Where secondary Income is always positive from FY 2018/2018 to 2023/2024. 

Current Accounts calculation formula- The current account is an important indicator of an economy's health. It is defined as the sum of the balance of trade (goods and services exports minus imports), net income

from abroad, and net current transfers. Here, USD {46.8+(3.0)+16.9-65.7}= -5b USD and -3.4b USD which was negative for the FY-2018/2019, 2020/2021 and the table it shows that it would be

negative following FY 2021/2022 up to projected FY 2023/2024 -18.8b USD ,-28.8b USD and -31.7b USD respectively. 

Capital Account and Errors, Omissions means Foreign Direct Investment (FDI) plus Foreign Loans and Grants which is actually disbursed which shows always positive for our Country. 

Error and Omissions usually occur in accounting systems. 

Our concern about the overall balance is about Foreign Currency Reserve of the country. 

Here overall balance equals (Capital Accounts + Errors and Omissions) minus Current Accounts. If we go through the Mr. Forrest Cookson’s Table, we will find 0.2b USD (5.2-.5.0) overall balance in FY 2018/2019 and for FY 2019/2020 (13.2-3.4)=9.8b USD which was taken from Bangladesh Bank Data was a positive balance of overall Foreign Currency Reserve for those two years. From FY 2021/2022 to the projected FY 2023/2024 Foreign Currency Reserve will stand at -4.3b, -2.8b and -12.7b USD respective FY 2021/2022, 2022/2023 and 2023/2024 which are negative. This is our main concern. If we subtract these negative overall foreign currency reserves from present balance of reserve, it will stand {39.0-4.3-12.8-12.7- (2.7+3.28+4.02)} 0.80b USD indicates we will possess only 0.80b USD for FY-2024/2025 Foreign Currency Reserve to meet the Balance of Payment. 

USD (2.7+3.28+4.02) billion is the foreign loan repayment from FY 2022/2023 to FY 2024/2025 ( Source-New Age, May 29, 2022 through ERD, GoB)

Any country having three months of foreign currency reserve to settle the Balance of Payment indicates good stability. In May 2022 Bangladesh needed 6.74b USD to pay Imports Payment.which was 2 per cent less than precedent months. It was possible after the declaration of the prime minister to reduce the import of luxurious products and it will be reduced probably from 7.0b to 6.0b USD meeting for monthly Imports Payment. Thus, we will require (3x6) 18.0b USD for the first quarter of FY-2024/2025 against possessing 0.80b USD foreign currency reserve. 

Though there is a contradiction about usable Foreign Currency Reserve. According to some experts, the usable foreign currency reserve is 31b USD. So, it will be more difficult for us having less than one year to meet the Balance of Payment. 

How we can recover from such an upcoming crisis?

We must consider Nostro Account Balance into present reserve and initiate a formula with a good combination of IMF’s External Balance of Assessment EBA formula. Payment of instruments can be placed over Nostro Account-bearing banks instead of Asian Clearing House (ACU). Imports payments can be met through other currencies like-Dinar, Riyal, and other currencies which has been followed by India recently. Engagement must be accelerated with those countries having huge trade deficits and offering them to settle imports payment through local currency or other products. 

The writer is a banker. He can be contacted at [email protected]