Forex reserve fiasco: Who is to blame?

In keeping with directives of the International Monetary Fund (IMF), Bangladesh Bank has begun calculating the country’s foreign exchange reserves from the third week of July. IMF had been putting pressure on Bangladesh Bank in this regard for quite some time, but for some mysterious reason, Bangladesh was not doing this.

In August 2021, Bangladesh Bank had declared that the country’s foreign exchange reserves had reached USD 48.06 billion, but IMF did not accept this. They said that the USD 7.5 billon of the export development fund would have to be subtracted from the declared reserves. The USD200 million that Bangladesh had loaned Sri Lanka from its own reserves, would also have to be deducted. Also to be deducted was the loans provided for dredging Payra Port’s Bamnabad channel and for the procurement of aircraft by Bangladesh Biman.

It is extremely unfortunate that for almost two long years Bangladesh Bank and the country’s top leadership paid no heed to IMF’s words. Now that Bangladesh is taking a USD 4.7 billion loan from IMF, Bangladesh Bank has been obliged to follow the latest BPM6 method of calculating reserves. But who will take responsibility for the irreparable damage done by this delay?

By following the redundant BPM5 method, they projected inflated foreign exchange reserves, based on which the government took several rash decisions over the past two years. The most damaging decision was to form the export development fund to provide businessmen with loans in foreign exchange. Most of these loans have now become forced loans, that is, these loans will never come back to Bangladesh Bank in the form of foreign exchange. Even worse, most of these loans are now in default. That means, in other words, a large chunk of the reserves has been looted.

Had it been understood that the actual reserves were much less than projected, then perhaps this unnecessary programme wouldn’t have been taken up. The USD 200 million loan provided from the reserves to Sri Lanka just to receive kudos, is also long overdue on repayment. Sri Lanka has already regretted twice that it is unable to make the repayments. And there can be no justification for the government to provide loans from its reserves to fun the Payra Port channel dredging and the Bangladesh Biman aircraft purchase.

But media reports of 2020 and 2021 point out how the government had repeatedly said that there was no logic in keeping huge of huge volume of foreign exchange in reserve. It was argued that very little interest was earned by letting it lie in the reserves. More interest could be earned by investing this in development projects and the government would also gain in capacity to take up more development projects.

In 2020 when our foreign exchange reserves crept up to USD 36 billion, I had written in the newspapers how this understanding was illogical. But who bothered?

On 16 July, in Banik Barta and Azadi I had written that the actual important of expanding reserves was that it symbolised how dynamic and strong a country’s economy was. When a country’s foreign exchange reserves were on a rise, then the policymakers of that economy had no need to succumb to anyone’s blackmailing. Such independence in taking up policies is invaluable, especially for developing countries. The acid test of the weakness or strength of any country’s economy is current account deficit versus surplus in balance of trade.

I wrote that the balance of trade in Bangladesh’s visible export and import flow in most years still had a deficit of around 15 to 20 billion dollars. But as we are becoming able to make up this deficit mainly from our steadily increasing remittance flow, we no longer are having to depend on handouts from foreign countries or international institutions. We still are eager to avail soft loans from the World Bank, IMF or Asian Development Bank, but most of our foreign loans are suppliers’ credit.

IMF’s condition for releasing the second tranche of its loan was that the reserves must reach USD 24.5 billion by the end of June 2023. We are USD 4 billion short.  

The problem with supplier’s credit, I wrote, is that when the suppliers provide the project’s plant, equipment and machinery as loans, the loan amount is provided at a rate much higher than the market rate. The supplier’s credit interest rates are much higher than that of soft loans and the repayment time is much shorter. Even more important is that in suppliers’ credit the ‘margin’ cut out for politicians, contractor businessmen and bureaucrats is much higher. Is there really any need to start delving into development expenditure?

As a result of ignoring my warning, the government is now floundering in the economic turmoil caused by the rapidly falling forex reserves. In two years the gross reserves have fallen to USD23.45 billion. This trend is certainly alarming.

The finance minister and the governor of Bangladesh Bank must take responsibility for this. Had they warned the prime minister in time of the dangers of not taking IMF’s directives into cognizance, perhaps the over confidence in the artificially inflated reserves would not have grown.

Despite trying hard for the past two years, the government has failed to halt the downward slide of the foreign exchange reserves. Even drastic slashing of imports has failed to stem the fall. Over the past two years, remittance through official channels hasn’t increased significantly. Though an estimated 15 million people of the country are working overseas, most of them send back the remittance through the informal hundi channels of money transfer.

The gross reserves of the country have steadily dropped and in July 2023 reached USD 23.45 billion. Even worse, the net reserves of the country are now just a bit over USD 20 billion. The net reserves are in actual terms, the accurate yardstick of a country’s import capacity! IMF’s condition for releasing the second tranche of its loan was that the reserves must reach USD 24.5 billion by the end of June 2023. We are USD 4 billion short.       

* Dr Mainul Islam is an economist and former professor of economics at Chattogram University 

* This column appeared in the print and online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir