For the first time in the history of the country, foreign debt has exceeded USD 100 billion and the usable reserves against this amount to only USD 15.82 billion (TBS, 28 November 2023).
Based on imports, the post-2018 time can be divided into two. In the 2018-20 period, the normal average monthly imports amounted to USD4.5 billion, even though reserves had increased during the Covid pandemic as imports has fallen due to disruption of the international supply chain.
After 2021, the country's normal average imports crossed USD 6.5 billion. That means, the average base of monthly imports has increased by nearly USD 2 billion. In some months (three months), imports exceeded USD 7.5 billion.
There are two allegations -- one, inflation due to the increase in international interest rates. So, though the volume of imports remains the same, the financial cost of imports has increase due to the cost of products. And two, siphoning off dollars by over invoicing in the name of imports.
However, if the average of the five years 2018-2023 is taken, the monthly average imports are USD 5.5 billion. But as the interest rate of England's LIBOR and the US' SOFA has reached 5.25 to 5.50 per cent, the price of commodities has increased worldwide. As a result,, Bangladesh's average monthly import demand went up from a minimum of USD 6 billion to USD 6.5 billion. If LC's are controlled and imports fall below this, then this will clearly mean a recession -- it will not be possible to keep economy and employment normal.
Every month on average a minimum of USD 1 billion to a maximum of USD 1.5 billion is being wasted. Basically, the sale of dollars by commercial banks is the reason behind this loss. On one hand, with the loan default process remaining in place, it has not been possible to rein in dollar laundering. On the other hand, the corruption and mistrust in the banking sector and low exchange rates has brought a sluggishness to overseas remittance.
When Islami Bank, which brought in the highest amount of remittance, underwent a change in ownership and various allegations arose of fraud in providing loans, clients lost confidence in the bank and increasingly turned to the informal money transfer system of hundi. This accelerated the depletion of foreign exchange reserves. Dollars are having to be released into the market for the import of fuel, food, chemical fertiliser, various essential commodities and industrial raw material. The central bank is having to sell dollars from the reserves to meet import liabilities, government and private loans and debt liabilities, and other liabilities.
Outside of the usable reserve, the central bank has some reserves in the form of foreign bonds, gold or the international reserve asset SDR, etc, which cannot be spent suddenly. According to government records, the gross total of unreturned loans of the Export Development Fund (EDF), the unreturned reserve loans of the development projects (IDF), etc, amounts to USD 25.16 billion dollars. Leaving out the displaced reserves of EDF and IDF, according to the International Monetary Fund's BPM6, the reserves are projected as USD 19.53 billion. Leaving out the IMF's SDR loans, the banks' local currency clearing and Asian Clearing Union (ACU)'s bills, the actual usable reserves stand at less than USD 9 billion.
Political unrest is another reason behind the fall in remittance through formal channels and the fall in foreign investment. The structural reason behind the gradual dip in global currency reserves include: 1. The dollar exchange rate being lower than in the hundi market; 2. the failure to ensure quality control in opening LCs; 3. with the practice of intentional loan default not halting in the banking sector, a part of these loans are laundered, exacerbating the reserve crisis; 4. default loans are entering hundi's local supply chain and so dollars are not coming in from abroad, the launderers, the only gambling business and crypto traders are keeping the dollars abroad to meet their legitimate and illegitimate needs.
As a result, while going overseas has increased, overseas remittance has decreased. While the government is said to forcefully hold on to the exchange rate, remittance isn't increasing through legal routes. Yet it is proven that when some banks increase the dollar rate, remittance increases too. When the taka exchange rate against the dollar increases, import inflation increases and the dollars acquired legally and illegally by launderers decreases.
The government has reserves enough only to meet import bills of two and a half months. However, the reserves won't dwindle to zero after two and a half months. The demand for fuel will fall from November to February due to winter.
When the demand for fuel goes up at the start of summer, then alongside the payment of past dues, pressure will step up to import fuel anew. While dollars will go away to paying foreign debt, import bills and through laundering, export earnings will come in and so will remittance. New foreign loans will come in too. The main problem is that even after the shrinking of imports, after all calculations, usable reserves will drop.
While remittance and exports are not increasing significantly (in fact, these are decreasing on average), there is risk of the reserves falling below 2 months' import bills within 6 to 9 months, If that happens, the value of the taka will fall once again.
After the election, the government will be obliged to replay the held-up debts, interest on loan installments and dues of various agencies will spiral up, crossing sustainable limits. The government will then have to take steps like selling bonds or gold, if it cannot increase its exports and remittance.
The government has decreased imports and is extensively deferring the opening of LCs, and so the businessmen are opening complaining that they are unable to import raw materials and capital machinery. This means a self-imposed recession of the economy. A decrease in the import of fuel, food, chemical fertiliser, and other essential commodities and industrial raw materials, will lead to an extension of the ongoing recession.
At the end of the first quarter of the 2023-24 financial year, the trade gap is negative USD 1.8 billion. While export of human resources overseas has increased, remittance isn't increasing in that proportion. As a result, opposite the low reserves there is the burden of extremely high interest on foreign loans (more than double increase in England's LIBOR and US SOFA interest rates).
As a result we see a large deficit in the financial account too (negative USD 2.01 billion, August 2023). The short term debit in the private sector (LC deferred and other debts) is 12.4 billion (September 2023). Overall, along with the currency crisis, a government-private external debt service crisis has been created too. This is globally recognised evidence of recession and crisis.
After the election, the government will be obliged to replay the held-up debts, interest on loan installments and dues of various agencies will spiral up, crossing sustainable limits. The government will then have to take steps like selling bonds or gold, if it cannot increase its exports and remittance.
The government has debts amounting to a few billion dollars in the power, energy and other sectors. The industries are unable to import capital machinery for long and so the central bank will have to sell dollars to the commercial banks for LC settlement. Reserves will plummet further down after paying the dues to the Adani, PDB, BAPEX, BPC, Biman, the digital sector and the tech giants. The amount of reserves after that will depend on how much dollars Bangladesh will sell in the market.
If the dollar rate free floats in the market, remittance will increase to an extent. With or without the approval of the central bank, some banks, have carried out a trial of the market rate policy, and brought in a good amount of remittance. According to Bruegel's REER calculations, on the basis of purchase capacity, the value of the taka against the dollar is Tk 154 to Tk 174. If the dollar exchange rate if left to the market before bringing a halt to money laundering, there are two dangers. The launderers will compete in increasing the hundi market rates and import costs will shoot up, leading to the risk of inflation.
The loan default problem is not being resolved and the government is continuing with rewriting and rescheduling to display less default loans, so if the dollar is free floated in this situation, laundering will not lessen. As long as the demand for laundering remains, this task cannot be brought about. There will be need for some Keynesian control here. If you want to halt money laundering, you will definitely have to bring an end to the spread of black money and particularly stop the culture of default loans.
Around the end of 2024, the country's usable reserves may fall below USD 10 billion and stabilise. Pakistan continued for a decade with such dwindling reserves. With such low reserves, it is difficult to get new loans or suppliers' credit. It is hard to import raw material and capital machinery, and then speedily increase exports. Once you fall into this cycle, it is very hard and time consuming to be extracted from it.
In order to stem the fall of reserves before the election, to halt the fall of the taka and to fulfill IMF's December reserve target, the government is forcefully buying dollars from commercial banks, though they are floundering to open and settle LCs due to the shortfall of dollars. This will increase the banks' LC capacity crisis. The economy will perhaps not become bankrupt because the government will forcefully decrease imports and then there is the export earnings and remittance. But the slump in business, trade, production and employment that has set in, will deepen. People's hunger and unemployment will increase.
The dollar crisis is taking us towards a fragile economy, prices are going up and unemployment is increasing. Instead of overcoming this crisis, we are gradually sliding down lower. The dollar crisis will increase the growing inflation and food prices, exacerbating the sufferings of the daily lives of the common people.
* Faiz Ahmad Taiyab is a sustainable development writer and can be contacted at faiz.taiyeb@gmail.com