Net forex reserves fall below $16b

Amid the persisting dollar crisis caused by the Russia-Ukraine war, Bangladesh Bank released the latest data on the country's foreign currency reserve last week, but the net foreign reserves are less than the amount the central bank said. According to the central bank sources, the net foreign reserves fell below USD 16 billion.

Global oil prices and freight costs have been increased since the Russia-Ukraine war, resulting in a rise in import costs for countries like Bangladesh, but the supply of foreign currency to those countries did not increase. Thus there is additional demand for dollars to meet import costs, and pressure falls on foreign reserves. As a result, the central bank started selling dollars from the reserves to pay the import liabilities of various products including essential fuel and chemical fertilisers.

Currently the foreign reserves, according to the latest data from Bangladesh Bank, fell to USD 25.16 billion from USD 48 billion in August 2021, while Bangladesh's foreign reserve, according to the Balance of Payments and International Investment Position Manual (BPM6) of the International Monetary Fund, now stands at USD 19.52 billion.

However, the entire amount of reserves as cited by the central bank is not utilizable, and the IMF advises the central bank to count the foreign reserve properly. Sources at Bangladesh Bank said net foreign reserve now falls below USD 16 billion.

Former chief economist of Bangladesh Bank Mustafa K Mujeri told Ptothom Alo the reserve has dropped to such a level which is not a crisis yet, but is worrying. The net reserve will cover imports for a maximum of three months, and that is being forcefully maintained by controlling imports. Otherwise, the figure will fall further. There is no need to manage foreign currency artificially now, and this market must be allowed to operate normally, the price will return to a normal state after rising slightly, and the reserves will start increasing again, he added.

Mustafa K Mujeri further said dollar prices increased to Tk 124 a dollar in kerb markets. So, someone must be purchasing dollars at this exchange rate and doing transactions in hundi. The entire remittance is not coming to the country through legal channels. Money is being siphoned off through hundi as well as other methods. The government's initiative to repatriate laundered money neither succeeded nor prevented money from being siphoned off. As a result, the economy faces a multifarious crisis, and there is seemingly no possibility to overcome this crisis any time soon, he added.

Calculation of forex reserves

As per Section 7(A) of the Bangladesh Bank Order 1972, the Bangladesh Bank is tasked with holding and managing the official foreign reserves of Bangladesh.

Foreign reserves work as the gatekeeper for clearing import liabilities of various countries, and, as per international standard, a country should least have a foreign reserve that can pay its import liabilities for a minimum of three months.

According to the latest data from Bangladesh Bank, foreign reserves stood at USD 19.52 billion as per the IMF’s BPM6 as of 22 November, and total foreign reserves were USD 25.16 billion.

Foreign reserves fell below USD 25 billion last week, but a rise in global bullion markets helped foreign reserve cross USD 25-billion mark as Bangladesh Bank invested the reserve fund in various bonds, currencies and gold abroad.

Though foreign reserves stood at USD 19.52 billion as per the IMF’s BPM6, net reserves fell below this estimate. More than USD 2 billion as IMF’s SDR, over 1 billion as foreign currency clearing accounts at banks and about USD 500 million as the bill of Asian Clearing Union (ACU) will be excluded, thus, net reserves stand below a little less than USD 16 billion. Experts said of those payments, there is no hurry the payment of IMF’s liability for now.

Bangladesh’s foreign reserves dropped to USD 1 billion in 1996-97 fiscal from a little over USD 3 billion in 1994-95 fiscal. Foreign reserves did top USD 2-billion mark till 2001-02 fiscal, and started increasing after that. Reserves dipped to USD 5 billion in 2007-09 fiscal from USD 7 billion amid global rescission. Since then, it continued to rise, and exploded amid the coronavirus pandemic due to fall in import and rise in inflow of remittance. Foreign reserves crossed USD 48-billion marks in 2021.

How foreign reserves rise and fall

Foreign currency reserves were the central bank’s property, but is has been used for other purposes from time to time to implement political decisions. Initiative was taken to lend to the private sector from reserve funds, which was not implemented later.

Banks also purchased surplus dollars of remittance and export earnings, the main source of reserves. Foreign loans, investment and grants, as well as the earnings of Bangladeshi troops deployed in UN peacekeeping missions add to the reserve directly.

On the other hand, Bangladesh Bank sells dollars when demand surges, and that has largely contributed to the fall in foreign reserves over the past two years. Central banks also sold dollars from the reserves to pay the import liabilities of the government’s food sector, fuel and chemical fertilisers. Foreign loans and fees are also paid from the reserve fund. Bangladesh Bank pays import liabilities to ACU member countries every two months. Banks pay the import liabilities to Bangladesh Bank regularly, which the central bank clears at one go.

How much has the crisis eased?

The dollar crisis still persists after one and a half years. Import costs decreased to USD 5.27 billion in September this year due to imposing restrictions on imports, and that is about 27 per cent less from the corresponding period of the previous year. Traders said they do not have dollars as much as they need to open LCs (letters of credit) whereas many entrepreneurs need to purchase dollars at an exchange rate that is Tk 12-13 higher than the fixed rate.

Earnings from exports dropped by 13 per cent year-on-year to USD 3.76 billion in October and rose by 30 per cent year-on-year to USD 1.97 billion in November.

Recently, dollar supply and spending indices improved slightly. Dollar surplus was at USD 890 million in July-September, while financial deficit amount to USD 3.67 billion in the corresponding period of the previous year. Sources said payment of short-term loans by banks and drop in imports contributed to this improved situation, but financial deficit remains.

The Bangladesh Foreign Exchange Dealers Association (BAFEDA) and the Association of Bankers Bangladesh (ABB) have been fixing the exchange rate since September 2022. Recently, they decided to decrease the price of dollars by Tk 0.5 a dollar for purchasing remittance and export earnings. Currently, the exchange rate of USD dollars now stands at a maximum Tk 110 a dollar by Tk 0.5 a dollar for purchasing remittance and export earnings.

However, the government gives a 2.5 per cent incentive on remittance, and banks can also also offer the same amount of incentive, thus, beneficiary of remittance can receive a maximum of Tk 115.50 a dollar. Banks, however, purchasing remittance at Tk 121 a dollar without the incentive, as well as selling dollar to importers at a price higher than they purchase.

Bangladesh Bank spokesperson Mejbaul Haque said in a press conference on 22 Wednesday that the short-term liability of foreign debt decreased to USD 6.90 billion this year from USD 16 billion in the last year. Besides, current account surplus amounts to USD 1 billion. At present, LCs are being opened with instant payment of dollars, thus, no future liability is arising. Besides, banks have more supply of dollars than demand, and more foreign loans will come in future, rising the foreign reserves.

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