Foreign reserves under pressure: The way out

In the recent days, the macroeconomic scenario in Bangladesh has come under much critical discussion. The IMF delegation, during their recent visit to the country, expressed deep concern over instability in the macroeconomic sphere.

Shortly after landing in Dhaka, the IMF mission put forward some suggestions regarding the affairs of economic reforms. The expressed their opinion on the banking sector, the exchange rate, foreign exchange reserve, the tax-to-GDP ratio, GDP publication, and other issues related to business and the economy.

The Bangladesh side agreed to IMF’s conditions aiming to get $ 4.50 billion in loans needed for national budget and foreign reserves. Among the conditions, the calculation method of foreign exchange reserves maintained by Bangladesh’s central bank had been crucial.

According to the Bangladesh Bank order 1972, Bangladesh Bank keeps authority in keeping and managing foreign currencies, which are included in the IMF’s Special Drawings Rights (SDRs) basket. Currently, the currencies in the SDRs basket are the US dollar, euro, Chinese Renminbi, Japanese Yen, and British Pound Sterling. What needs to be noted here is that precious metal is also considered while calculating the amount of the reserves.

The SDR is an international reserve asset created by the IMF to supplement the official reserves of its member countries. SDRs are generally utilized to exchange for other currencies, loan repayments, payments of obligations, pledges, and interest payments on loans. Now, international trade is made based on the five currencies mentioned above, apart from currency swap arrangements.

Like other countries, Bangladesh is authorized to do international business with the same currencies mentioned above. In particular, Bangladesh settles international payments and obligations in the form of US currency dollar also known as the greenback.

When Bangladesh saw $37.3 billion in foreign reserves, the share of the US dollar was around 73 per cent, and the Chinese Renminbi was approximately 1.40 per cent. Notably, a significant volume of the US dollar in forex reserve is required to meet import payments and foreign loans in the current context. It is alarming that the Balance of Payment (BoP) deficit recorded worth $ 344 crore dollar during July -September of FY 23, which was 81 crore dollars in the last fiscal of the same period.

The BoP is directly connected with the country’s forex reserves, which fluctuate based on the BoP situation. The higher BoP deficit leads to a lower reserve position. The BoP is built with the combination of the current, capital, and financial account. Being an import-oriented country, Bangladesh’s payment procedures are expected to face difficult times with the current depleting forex reserves.

It is widely well-known that due to the Ukraine-Russia war, import costs have already been skyrocketing. Mainly, Bangladesh heavily depends on export earnings and foreign remittances sent by expatriates to settle import payments. Sadly, earnings from export sides are decreasing, mainly in the form of the US dollar.

Besides, foreign remittance inflow through formal channels is observed to be in poor volume, which is lower than expected. If the influx of foreign capital was significant, it would have worked as extra support for foreign exchange reserves.

As of November 16, 2022, the forex reserve was $ 34.24 billion according to the previously followed calculation. If we follow the internationally practiced IMF calculating method, the reserve stood at $ 26.24 billion (usable reserve). In August last year, the gross reserve amount reached its highest at $ 48 billion. The reasons for the declining of the forex reserve are many. It is not possible to describe it briefly. The foreign exchange market in Bangladesh for the last couple of months has been in a troublesome situation caused by the dollar crunch.

As a watchdog, Bangladesh Bank is responsible for stabilizing the forex market. As part of its role, Bangladesh Bank has injected US currency into the forex market worth $ 10 billion- according to media reports. Bangladesh has to pay $ 7 billion per month on average as import payments apart from paying $ 1 (One) billion for the purpose of repaying foreign debt.

No matter how much reserve is needed for import and loans payment, there is no need to get panicked about declining foreign reserve trends if remittance, export earnings, and FDI inflow continue as expected. Usually, a country must keep a reserve for three-month import payments as per international standards.

A Bangla language newspaper recently reported that India has an import payment capacity of 15 months with its reserve, Switzerland 39 months, Japan 22 months, Russia 20 months, and China 16 months. It is found that developed economies keep enormous reserves for addressing the untoward economic situation.

Bangladesh, a least developed country, gloated over its supposed $ 48 billion reserve. They’ve seen a little visionary plan with the record highest reserve in August 2021. Bangladesh Bank created Export Development Fund (EDF), Long Term Fund (LTF), and Green Transformation Fund (GTF) with segments of the reserve amount.

With the reserve, the government created Bangladesh Infrastructure Development Fund (BIDF) to finance mega projects. An island nation Sri Lanka was also sanctioned loans from the reserve.

Because of the government’s move with reserve money, I instantly wrote a column where I suggested keeping reserve money for rainy days in the economy. In the current context, foreign reserves come under a comprehensive range of discussion from all quarters. Even though, Bangladesh Bank is on the move in earning and saving foreign currency, mostly greenbacks, through policy supports.

The government has already sought IMF assistance in fattening its foreign reserves. Usually, IMF provides reserve support from its funds titled Extended Credit Facility (ECF) and Extended Fund Facility (EFF). Upon IMF management approval, Bangladesh would get $ 3.2 billion to address the balance of payments problems Bangladesh faces now. With so little amount provided by IMF, foreign reserve in Bangladesh will not be able to addresses war-related challenges.

Considering the current reserve situation, Bangladesh has to scale up facilities for local exporters and remittance senders. The banks have many roles in setting up exchange houses abroad for fetching remittances through formal channels. A move to minimize cross-border illegal financial transactions is in timely demand. Foreign missions might have increased their surveillance in controlling the Hundi channel, an illegal channel for cross-border transactions. Forex reserves in the economy represent economic strength no doubt. An economy like Bangladesh should not use it reserve for reasons other than import payments and external debt repayment.

The writer is an economic affairs analyst. He can be reached at [email protected]