Forex reserves recede, no way to stop

Despite various efforts, including curbing imports, the forex reserve of Bangladesh Bank continues to decline and it cannot be controlled.

In August 2021, the net forex reserve of the Bangladesh Bank was more than USD 48 billion, which has declined to USD 26.74 billion now.

The current forex reserve stands at USD 20.90 billion as per the International Monetary Fund’s (IMF) method of calculating, BPM6.

There is another calculation of the net forex reserve of the central bank, which is disclosed only to the IMF. The IMF says according to that calculation the current forex reserve of the country is below USD 17 billion. The reserve has been declining by USD 1 billion per month for the last two years.

The remaining forex reserve of the central bank can cover three month’s import cost. Generally, a country must have three month’s import cost in its reserve. As such, Bangladesh is now on the edge.

The forex reserve is one of the key indicators of a country’s economy. However, the government is yet to find a way to stop its fall.

One of the major conditions for the USD 4.7 billion loan from the IMF was maintaining a net reserve of USD 24.46 billion in June last year, USD 25.30 billion in September and USD 26.80 billion in December.

The IMF also provided the method of calculating net reserve to Bangladesh in writing. Bangladesh has started informing the IMF about the actual reserve based on the method provided by them. However, Bangladesh is failing to maintain the reserve as per the conditions set by the IMF.

According to the BPM6 of IMF, the expenses for the liability of the Asian Clearing Union (ACU) and the foreign currency clearing of the bank and dollars under the special drawing rights are excluded in the calculation of the net reserve.

In all, it is being observed that the government has failed to maintain the reserve as asked by the IMF. An IMF delegation is currently visiting the country. Their main agendas will be preventing the decline of the forex reserve and situation regarding fulfilling the conditions set by the IMF.

The economists have also raised concerns regarding the reserve situation. Addressing the annual council of the International Business Forum of Bangladesh (IBFB), former lead economist of the World Bank’s Dhaka office Zahid Hussain said, “There is no actual calculation of the amount of foreign currencies entering or going out of the country. The reserve is on decline due to the deficit in the transaction balance. Although the current reserve has not reached the dangerous level yet, it is quite concerning. The reserve is being declined by USD 1 billion per month. If this trend continues, then our reserve will be empty at one point. In that case, there will be no way out of it.

The Bangladesh Bank doesn’t keep the reserve to itself. It invests in different sectors. The central bank profits from these investments. Sometimes it incurs loss as well.

A major part of the reserve is in dollars now. The amount of this is around USD 18.45 billion, which was USD 31.90 billion in June last year. Besides, the central bank has invested in Euro, pound, Australian dollar, Canadian dollar, Japanese yen, Chinese yuan and in Singapore dollars. Besides, the central bank has purchased gold worth USD 860 million, which was USD 820 million last year.

Apart from preserving, the BB has also spent from the reserve. For instance, the BB has created the Export Development Fund (EDF) with the money from reserves. However, they had to cut the size of the fund to USD 3.7 billion from USD 7 billion as the IMF told the BB to exclude the money for EDF to calculate the actual reserve.

Besides, several funds created with money from the reserve, including the Long Term Fund (LTF) and Green Transformation Fund (GTF), the money provided to the Sonali Bank to purchase aeroplane for the Biman Bangladesh Airlines and the money given for the excavation of Rabnabad Channel of the Paira port were excluded while assessing the net reserve of the country following the instructions of the IMF.

However, speaking to Prothom Alo, Mezbaul Haque, spokesperson of the central bank said, “The dollar crisis has decreased. There have been improvements in the balance of the transaction. The situation will improve further as a result of various initiatives taken up by the government.”

The Bangladesh Bank has set a limit of foreign currencies that a bank can keep. Dollars come to banks through remittances, export incomes, income of the freelancers, loans of private firms and through donations. When the forex reserve of any bank exceeds the limit, it sells it to the central bank. Besides, different loans, donations, and incomes of the officials in United Nations peace missions are directly added to the forex reserve.

On the other hand, the Bangladesh Bank clears the instalments of the foreign loans, service charges and other fees on behalf of the government. When it supplies dollars to different banks for different government imports, the reserve falls.

The BB sold currencies worth more than USD 3 billion in the first three months of the year, which was USD 13.58 billion in the 2022-23 fiscal and 7.62 billion in the 2021-22 fiscal.

Mainly, all banks have been suffering since the emergence of the dollar crisis. As a result, nobody is selling dollars to the central bank. However, the BB kept selling dollars to other banks. There the forex reserve is dwindling. Even in this context, the BB has sold dollars at lower prices to influential people.

Besides, it has maintained the price of the dollars instead of leaving it to the market. As a result, the expatriate income has also declined. Amid this, the central bank has fined treasury chiefs of 10 Banks for for selling dollars at higher prices. They have been fined Tk 100,000 each, which has further deteriorated the crisis, officials affiliated with the banking sector said.

Speaking regarding this to Prothom Alo, Association of Bankers Bangladesh’s former chairman Anis A Khan said, “The traders are unable to open letters of credit required for importing essential products. Several foreign agencies are unable to remit the profit. The situation can be easily assumed. There is no alternative to leaving the dollar prices to the market to overcome the crisis.”

“There is reason to think over the price as it has already gone up. The government can form a council with experts from home and abroad. Such a council may show us the way to come out of this crisis”, he added.

The dollar crisis emerged due to the rise of prices of the products following the Russian invasion of Ukraine. The price of dollars has risen to Tk 110 per dollar from Tk 88 in just one and half years. As a result, the food price inflation has risen to 12.37 per cent now.

The Bangladesh Foreign Exchange Dealers Association (BAFEDA) and Association of Bankers Bangladesh (ABB) fix the dollar rate from time to time at the advice of the BB based on the demand and supply. The official dollar rate is rising every month. As per the new decision, the price of dollars has been fixed at a rate of Tk 110 in case of export income and remittance.

Meanwhile, the banks are selling dollars at a rate of Tk 110.50 to the importers. However, in reality, the dollars are being sold at a much higher rate than this. Therefore, the transaction of foreign currencies through the informal channels has also increased.

Speaking to Prothom Alo, former Bangladesh Bank governor Salehuddin Ahmed said, “It is a big challenge to maintain the net reserves to cover not only imports, but also other foreign expenses, because we might have to import fertiliser, food and other things in case of any disaster.”

“The more the reserve decreases, the more the taka loses its value. Although imports were curbed due to the demand, it is not good for the economy. So initiatives should be taken to increase remittance and wage earners' income. The price of dollars should be determined by the market. Remittance inflow has fallen due to repeated changes in the price of dollars as well as political instability,” he added.

The former BB governor further said, “It was a wrong decision of the Bangladesh Bank to maintain the prince of the dollars and sell it from the reserve. We must bring the money launderers to book to overcome the situation. It will help bring down transactions through hundi (illegal way of foreign currency transaction). It will help increase the transaction of foreign currencies in legal ways, which will work as a kind of solution to the problem.”

*This report appeared on the print and online versions of Prothom Alo and has been rewritten in English by Ashish Basu