South Asia faces serious forex crisis

_ BD reserve down to $ 41b
_ Sri Lanka, Afghanistan faces humanitarian crisis
_ Nepal, Bhutan, Pakistan & Maldives in red zone

Enayet Karim: Foreign exchange reserves play an increasingly important role in linking emerging markets and developed economies. But six out of 8 South Asian nations at the moment is in turmoil situation due to lowest foreign currency reserve. At the moment, India has no pressure to repay loan from its $540 billion reserves. Though Bangladesh is not such a pressure to face immediate crisis but the situation is not comfortable due to the poor inward remittances during last five months.
The foreign currency reserve crisis facing South Asian countries are: Sri Lanka, Maldives, Nepal, Pakistan, Bhutan and Afghanistan. Of them, the situation of Sri Lanka, Maldives, Pakistan and Bhutan is critical.
Due to growing trade deficit, high external debt repayment and weak cash flow, foreign currency reserves have fallen to the lowest level since 2019 in all of 8 South Asian countries including Bangladesh.
The Bangladesh foreign currency reserve stood at around US$ 41 billion in the end of April but it could be lowered to $ 32 billion after the loan payment in June.
The reserve mainly declined due to 17 percent of lower inflow of inward remittances during last 3 months, in one hand, on the other hand the exports during June 2021 to December 2021 was slow for the world-wide Covid-19 pandemic. Though the exports during last 3-month have witnessed about 18 percent growth. Experts said that the economy of Bangladesh will not face any debacle comparatively with the other South Asian nations but the country has to pass very hard time to tackle thewave.
Global Economist Forum (GEF) sources told there is no immediate risk for Bangladesh as the country has a sound forex reserve to mitigate four months import bills.
Sri Lanka declares bankrupt
Last week, Sri Lanka named a new central bank chief and almost doubled its key interest rate to help tackle soaring prices and shortages of essential goods.
In recent weeks, demonstrators have taken to the streets of the capital Colombo as homes and businesses were hit with long power cuts.
Sri Lankans are faced with shortages and rising inflation after the country steeply devalued its currency last month ahead of talks with the International Monetary Fund over a bailout.
Anger against Sri Lankan President Gotabaya Rajapaksa’s handling of a deepening economic crisis in the island nation of 22 million people spiraled into violence late on Thursday, as hundreds of protesters clashed with police for several hours. A severe shortage of foreign currency has left Rajapaksa’s government unable to pay for essential imports, including fuel, leading to debilitating power cuts lasting up to 13 hours. Ordinary Sri Lankans are also dealing with shortages and soaring inflation, after the country steeply devalued its currency last month ahead of talks with the International Monetary Fund (IMF) for a loan program.
“Sri Lanka is a classic twin deficits economy,” said a 2019 Asian Development Bank working paper. “Twin deficits signal that a country’s national expenditure exceeds its national income, and that its production of tradable goods and services is inadequate.”
But the current crisis was accelerated by deep tax cuts promised by Rajapaksa during a 2019 election campaign that were enacted months before the COVID-19 pandemic, which wiped out parts of Sri Lanka’s economy.
With the country’s lucrative tourism industry and foreign workers’ remittances sapped by the pandemic, credit ratings agencies moved to downgrade Sri Lanka and effectively locked it out of international capital markets.
In turn, Sri Lanka’s debt management programme, which depended on accessing those markets, derailed and foreign exchange reserves plummeted by almost 70 per cent in two years.
The Rajapaksa government’s decision to ban all chemical fertilisers in 2021, a move that was later reversed, also hit the country’s farm sector and triggered a drop in the critical rice crop.
What happens with Sri Lanka’s foreign debt?
As of February, the country was left with only $2.31 billion in its reserves but faces debt repayments of around $4 billion in 2022, including a $1 billion international sovereign bond (ISB) maturing in July. ISBs make up the largest share of Sri Lanka’s foreign debt at $12.55 billion, with the Asian Development Bank, Japan and China among the other major lenders.
In a review of the country’s economy released last month, the IMF said that public debt had risen to “unsustainable levels” and foreign exchange reserves were insufficient for near-term debt payments.
In a note late last month, Citi Research said that the IMF report’s conclusion and the government’s recent measures were insufficient to restore debt sustainability, strongly indicating the need for debt restructuring”.
Pakistan in turmoil situation
Politically imbalanced-Pakistan has the capability to allow only one and a half months of import bill to be repaid. The country may be in a situation similar to Sri Lanka due to its economic and political situation. Compared to that, the economy and politics of Bangladesh are much stronger.
According to data released by the State Bank of Pakistan (SBP), the flow for the week ended May 8 was $16.4 billion, up from $16.5 billion a week earlier. The country’s reserves stood at $16.38 billion, down $ 16 million or 1.1% from a week earlier. According to the central bank, the reserves have also come down to a 23-month low.
When Bangladesh became independent, the reserve was not even a dollar. This war-torn country is set to become a developing country in five decades. At the beginning of the journey to Bangladesh, it was called ‘bottomless basket’. Now this country is getting recognition as a role model of development. Pakistan’s central reserves fell by $ 190 million to $16.306 billion, due to the decline in reserves due to external inflows related to external debt repayment.
However, the reserves of commercial banks have increased from $ 6.054 billion to $6.06 billion. Rising double-digit deficits (current accounts and trade), a lack of foreign exchange flows, and an increase in foreign debt service obligations have led to a sharp decline in foreign exchange reserves. Falling reserves have put pressure on the currency. This is because it is at an all-time low of Rs 210 per dollar in the interbank Pakistan market.
Delays in reviving the International Monetary Fund (IMF) bailout and lack of pledge of funds from friendly countries are increasing the pressure on foreign reserves and local units. Prime Minister Shahbaz Sharif, who took office last month after ousting former Prime Minister Imran Khan, is facing a rough fight to revive the IMF bailout. Because it is a prerequisite for further financial support from other bilateral and multilateral lenders.
All in all, Pakistan is going through a complex economic crisis, which is undoubtedly a do-or-die situation for the new government. It remains to be seen whether this nuclear-armed country in South Asia will find a friendly institution or state in resolving the crisis.
Nepal restricts imports
Nepal has restricted imports of non-essential goods – including cars, cosmetics and gold – after its foreign currency reserves dropped significantly.
It comes as a fall in tourism spending and money sent home by Nepalis working abroad helped drive up government debt.
Meanwhile, the governor of the Nepal central bank was removed from his role last week.
Nepal’s finance minister said he was “surprised” the issue was being compared with the crisis in Sri Lanka.
According to the country’s central bank, Nepal Rastra Bank, foreign currency reserves fell by more than 16% to 1.17tn Nepali rupees ($9.59bn; £7.36bn) in the seven months to the middle of February.Over the same period, the amount of money sent to Nepal by people working abroad fell by almost 5%.
Last week, Nepal’s government removed central bank governor Maha Prasad Adhikari from his role, without giving a reason for the decision.
Government debt in Nepal has risen to more than 43% of its gross domestic product, as officials increased spending to help cushion the economic impact of pandemic, Nepal’s finance ministry said.
Indian forex reserve declined
India’s foreign exchange (forex) reserves dropped by $28.05 billion in the second half of FY22. RBI’s latest data shows that the country’s reserves stood at $607.31 billion from October 2021 to March 2022.In the first half of FY22 ending September 2021, the reserves stood at $635.36 billion.
As of March 31, 2022, foreign exchange assets stood at $540.72 billion, while gold reserves are at $42.55 billion and SDRs at $18.89 billion while RTP came in at $5.14 billion.
Under foreign currency assets, reserves in securities declined to $363.03 billion in H2FY22 compared to $383.74 billion in H1FY22, while reserves in deposits with other central banks & BIS – dropped to $140.54 billion in H2 compared to $147.86 billion in H1. Reserves in deposits with commercial banks overseas plunged to $37.16 billion in H2 against $42 billion in H1.
Notably, although both the US dollar and Euro are intervention currencies and the Foreign Currency Assets (FCA) are maintained in major currencies, the foreign exchange reserves are denominated and expressed in US dollar terms.
Furthermore, movements in the FCA occur mainly on account of the purchase and sale of foreign exchange by the RBI, income arising out of the deployment of the foreign exchange reserves, external aid receipts of the Central Government, and changes on account of revaluation of the assets.
Meanwhile, the net forward asset (receivable) of RBI in the domestic foreign exchange market stood at $65.79 billion as of the end of March 2022.
Maldives faces hard crisis
The Maldives’ economy, which is largely dependent on tourism, declined heavily last year. Its low level of reserves and high indebtedness pose threats to macroeconomic stability. Though its tourism has recorded some growth and exports increased in February, its foreign reserves declined and inflation dipping to as low as 0.34% indicates sluggish economic activities.Few months before the Maldives request Bangladesh to lend $ 25 million in foreign currency as the foreign currency reserve of the country stood at only $ 0.75 billion.
It is worth mentioning that Maldives has to import ‘dal to rice’ and ‘pin to plane’. The only source of income of the country is the tourism and fishing. But the Covid-19 has destabilized the tourism of Maldives to the bottom level of history.
Bhutan keeps reserve in Rupee
The South Asian small nation-Bhutan has curved all kinds of imports due to the decline of foreign currency reserves stood at only US$ 1.43 billion. They are now thinking to convert the reserve in Indian Rupee instead of US dollar.
Bhutan’s reserves ought to be in Rupee although the spending was debt finance, if the government was spending on high return investments, Professor Joseph Stiglitz said the country’s balance sheet was improving. Sometimes, he said, putting the economy into balance required increased government spending. Taking the most conspicuous example of how Bhutanese spent excessively in purchase of cars, he said one remedy was high taxes on automobiles to discourage private cars, especially luxury ones, and using some of that revenue to expand public transportation. “Such a shift can lead to overall better economic performance, but this would require expanding government spending,” he said. In relation to that, Prof. Stiglitz then spoke about reserve management, and how it was related to necessary purchases. Reserves, he said, were there to manage any short-term economic volatility. “Size of reserves should be focused on essentials,” he said. “Countries can easily give up the import of luxuries.” Reserves, he also said, should be held disproportionately in the currency in which the goods were imported. “When it comes to currencies, countries face the risk of exchange rate,” he said, adding that, for Bhutan, since most imports were in Rupee, the focus of reserves ought to be in Rupee from a risk management perspective. “If you put the money in USD, you’re getting close to zero returns, in fact, you’re getting a negative return.” Relative to the value of the Rupee, he said the Dollar was certainly going to fall, because the long-term trend of the Dollar, relative to the emerging markets, was falling. “There is a lot of volatility,” he said.
Afghanistan faces humanitarian crisis
The current humanitarian crisis could lead to more deaths than twenty years of war that 82 percent of Afthan families had lost wages since August 2021 and almost one in five were sending children to engage in labour. While 7.5 percent stated they were resorted to begging or requesting money or food from charity. The huge spike in prices caused by the economic crisis has left many families unable to afford food.
The Afghanistan country director of Save the Children said: I’ve never seen anything like the desperate situation we have here in Afghanistan. We treat frighteningly ill children every day who haven’t eaten anything except bread for months. Parents are having to make impossible decisions – which of their children do they feed? Do they send their children to work or let them starve? These are excruciating choices that no parent should have to make.
The forex reserve of the country come down to $9.5 billion in the end of April 2022.