Central bank under pressure as forex reserve falling

The foreign exchange reserve of Bangladesh Bank is declining continuously in the face of the dollar-crisis and under such condition, the International Monetary Fund (IMF) is pressing to disclose the actual size of the reserve.

The political arena has become heated over the declining of reserve and its usage.

Bangladesh Bank is constantly selling out dollars from the reserve due to crisis. It will shrink even further in the days ahead.

Amidst such a condition, Bangladesh Bank along with National Board of Revenue (NBR) has taken various initiatives to reduce import.

In consequence, opening letters of credit (LC) for import dropped in September. LCs worth 6.17 billion dollars were opened in September while LCs for import worth 7.1 billion dollars were opened in February.

Though opening LCs for import has decreased for implementing various rules and regulations, there are questions whether the steps taken to control the situation are enough.

Since the beginning of the current 2022-23 fiscal year, Bangladesh Bank has sold 4.89 billion dollars from the reserve. Meanwhile, 7.62 billion dollars were sold in the last fiscal year.

As much as 90 per cent of the sold dollars was spent on importing fuel and fertilizers. As a result, the reserve has shrunk down to 35.85 billion dollars now. The reserve soared up to 4.8 billion dollar in August last year.

Alongside dollars, Bangladesh Bank has invested the reserve money in various bonds, currencies and gold abroad. Most of it is kept in dollars. Plus, funds have also been formed inside the country with the reserve money.

The Export Development Fund (EDF) has been created, taking 7 billion dollars from the reserve. Apart from that, Long Term Fund (LTF) and Green Transformation Fund (GTF) have also been formed with the reserve money.

Bangladesh Biman and Sonali Bank have been given money from the reserve to buy aircraft. Plus, money from the reserve has also been spent on Payra port’s Rabnabad channel dredging project.

8 billion dollars have been given to different funds and projects from the reserve. Leaving this out, another 200 million dollars have been given to Sri Lanka.

A delegation of IMF is visiting Bangladesh right now. As part of providing Bangladesh with a loan the visiting delegation is meeting with different regulatory bodies of the financial sector including the finance ministry and Bangladesh Bank.

During a meeting with Bangladesh Bank last Thursday, the global lender suggested calculating the actual usable reserve, raising questions about the calculation of the reserve. Bangladesh Bank has also agreed to that.

When the reserve is totaled following IMF’s advice, it will shrink down to more or less 27 billion dollars. Alongside excluding the reserve money allocated in different sectors from the calculation, the IMF delegation has also advised not to finance any project of Bangladesh Infrastructure Development Fund (BIDF) from the reserve.

Meanwhile, the Russia-Ukraine war has had a negative impact on goods price in the global market, since the war broke out last February. The global economy turned volatile.

Bangladesh’s import cost went up as well for the price hike in fuel, food items, capital machineries and raw materials in the global market. In comparison to that, export earnings and remittance went down instead of going up though.

Consequently, a dollar crisis was created in the country and prices went up. As a result, the country has cut down on fuel oil import. And the fuel crisis has had a great impact on the power sector.

While talking to Prothom Alo, former Bangladesh Bank governor Salehuddin Ahmed said, “To deal with the current situation, import of all products except the highly essential ones has to be reduced. And, Bangladesh Bank should fix a uniform maximum dollar exchange rate.”

“Alongside, foreign investment has to be encouraged after eliminating bureaucratic complications. Bangladesh Bank can also release two types of information regarding the reserve; instead of slashing 8 billion dollar in one go following IMF’s advice. This will clear the confusion,” he added.

Salehuddin Ahmed further said, “Issues like why the import increased so much prior to the war being started, whether all capital machineries arrived in the country or not should be investigated. Those who are amassing wealth illegally beyond the borders, in different sector including hotel and real estate, have to be brought under the book.”

“Permitting investment abroad was a wrong decision. Plus, whether the foreign exchange reserve money has been used appropriately or not has to be investigated too,” he continued.