Forex reserves: Good amount, but falling

In a bid to tackle dollar crisis, Bangladesh Bank has sold $10 billion from its foreign exchange reserves in the last seven months, decreasing the amount to $36.40 billion.

However, entire $36.40 billion is not of use because $8 billion from the reserves have been invested in many sectors and this portion of the fund cannot be recovered easily.

Thus, the amount of useable reserves stands at $29 billion.

Earnings from export and remittance cannot meet the demand of dollar amidst the rise in import cost. The situation has created a dollar crisis and the exchange rate has increased by about Tk 20 a dollar.

The exchange rate stood about Tk 105 a dollar for import payment.

Some $6.33 billion were spent for import in July. Besides, various expenditures including government and private foreign loan, technology service fees, education and treatment, and airfares are paid in dollars entirely. So, the current reserve will be able to meet import labiality for four months.

Earnings from export and remittance also increased despite dollar crisis, with foreign loans and grants also coming. As a result, the central bank is not much worried about the reserve.

Various measures have been taken to reduce the import pressure, with central bank leaving the responsibility to fix the exchange rate on the banks.

According to the Bangladesh Bank Order 1972, Bangladesh Bank exercises the authority on the type and management of foreign currency. Reserve functions as the protection to the settlement of import payment. Usually, a country should have the reserve enough to pay the import liability for three months as per the international standard.

Speaking to Prothom Alo, private research organisation South Asian Network on Economic Modeling (SANEM) Selim Raihan said it is concerning that how the reserve is declining. Earnings from export and remittance will increase, but there is a fear over what the state of export will be in Bangladesh because of economic slowdown in Europe.

The government has taken many steps to control import in a bid to tackle the situation and may reduce growth. At present, macroeconomic stability must be emphasised more than GDP growth and the government must take further measures considering the overall situations, he added.

Dollar crisis is contributing to decline in reserve. Prices of fuel oil and food products increase following the Russian invasion of Ukraine. As a result, additional $2 billion from export earnings and remittance are spent for import in April, thus, beginning dollar crisis. Central bank controlled the dollar price, triggering the crisis. Besides, the government also started selling dollar from reserves to meet import liability of fuel oil and foods.

Amid this situation, Bangladesh Bank starts raising dollar price depreciating value of taka. Opening of LC (letter of credit) was halted to discourage import of several products while 100 per cent margin was given in some products to encourage import. The National Board of Revenue (NBR) also imposes additional duty on import of several products. Still dollar crisis is yet to go away.

Speaking to Prothom Alo, former managing director of Bank Asia Arfan Ali said, “Reserves that had increased during coronavirus outbreak are being spent now. There is nothing to worry. It is adequate to have import cost for three months in reserve. However, it is better not to build any infrastructure and make any investment that spends dollar for now.”

Bangladesh Bank has started selling dollar since April to tackle the currency crisis. However, the central bank did not sell dollars as much as there was the deficit. So, banks start receiving remittance at higher price, resulting in dollar price hike. The exchange rate of the US dollar was at Tk 85 in April. Now, banks are providing maximum Tk 107.50 a dollar for remittance.

Banks have been given the responsibility to fix the exchange rate since 12 September in a bid to check the soaring dollar price.

Association of Bankers, Bangladesh (ABB) and Bangladesh Foreign Exchange Dealer's Association (BAFEDA) set the exchange rate at Tk 99 and Tk 107.50 a dollar for exporters and remitters respectively. Banks have set the rate by Tk 1 more than the average of these two exchange rates for import cost.

As a result, rise in dollar price stops for now, with import decreasing as well as export earnings and remittance increasing.

Speaking to Prothom Alo, BAFEDA chairman and Soanli Bank managing director Afzal Karim said dollar supply has increased and demand also decreased. As a result, price is dropping. In between, price was raised artificially; fear that persisted over dollar price has gone away and crisis will also be eased slowly, he added.

There is a growing pressure on the foreign currency reserve of Bangladesh Bank because of selling dollar from reserve, which dropped to $36.40 billon now from $46 billion in February since about $10 billion have been sold from the reserve over the past seven months.

Bangladesh Bank still sells dollars from reserve at an exchange rate of Tk 96 though the inter-bank exchange rate, as mentioned in the central bank’s website, is Tk 101-103 a dollar. Likewise, reserve surpasses $36 billion, but the actual useable amount is $29 billion. So, there are confusion over both amount of reserve and price of dollar.

On the other hand, India can meet 15 months of its import liability with its reserve, Switzerland 39 months, Japan 22 months, Russia 20 months and China can meet 16 months of its import liability.

Beside the reserves, Bangladesh Bank has also invested dollars in various bonds, currencies and gold at foreign countries. The central bank has also created a fund with money from the reserve in the country and that include an export development fund of $7 billion, a long term fund (LTF) and a green transformation fund (GTF).

Funds from the reserve were also provided to Biman Bangladesh Airlines and Sonali Bank to purchase airplanes as well as to Rabnabad channel dredging project of Payra port. Some $8 billion altogether have been used on these purposes.

Other than this, $2 million has been provided to Sri Lanka from the reserve and the International Monetary Fund (IMF) has questioned the counting method of foreign reserve and asked to count the amount of actual reserve.

*This report appeared in the print and online edition of Prothom Alo and has been rewritten in English by Hasanul Banna