Concerns rise over reserve depletion

Syed Nasir Hossain: The rate at which the foreign exchange reserves in the central bank is decreasing rapidly is increasing the concern in the country’s economy. Two-and-a-half years ago, the reserve was $48 billion, according to the central bank, it has now decreased to $23.77 billion. There are just over $13 billion in net reserves to spend. Economists say, this is now a ‘red signal’ for the economy. They say the rapid depletion of reserves is creating several fears for the economy.
The biggest fear is a reduction in import capacity. The dollar crisis forced the government to adopt a contractionary import policy. As a result, the import of industrial raw materials and machinery is decreasing, so the investment is also decreasing. As investment is less, employment is decreasing. If the ability to meet the cost of import decreases, even the necessary fuel cannot be imported. It will disrupt industrial production as well as disrupt agriculture. Food insecurity will increase. At the same time, if there is an energy crisis, there is a fear of disaster in the transport sector as well.
Economist and Center for Policy Dialogue (CPD) Honorary Fellow Professor Dr. Mostafizur Rahman told, “The rate at which the foreign currency reserve is decreasing in recent times is a matter of great concern. This reserve depletion has already created fears in many sectors of the economy. The biggest fear is that the government will not be able to import essential food items if the reserves deplete further. Although I hope the government will give a lot of importance to the import of food products, there are still fears.
He said that investment in the country is decreasing since the last corona. Then the contractionary monetary policy adopted by the government due to the ongoing dollar crisis over the last one and a half to two years further reduced investment. Because the import of machineries and raw materials for industry is being controlled a lot. This has reduced investment in industry, thereby reducing employment. Besides, foreign investment has also decreased. Overall, there has been a stagnation in the investment situation. Depletion of reserves will also make it difficult for the government to repay foreign debt. All in all, due to declining reserves, the country will face external and internal multifaceted crisis.
How much actual reserve: It is known that after meeting the liabilities of March and April in the Asian Clearing Union (AKU), the total reserve of Bangladesh Bank has decreased to $23.77 billion. And according to International Monetary Fund (IMF) accounting method BPM 6, the reserve is now $18.32 billion. However, according to the calculation of the reserve, which excludes the money deposited for repayment of all types of liabilities, including the dollar held as SDR by the IMF, the usable reserve amount is slightly less than $13 billion. This is the real reserve worth spending. There is no obligation on the contrary and it can be used at any time. Despite the contractionary import policy, an average of about $5 billion is required to meet import liabilities every month. As a result, even three months of import expenses cannot be met with the actual reserve money.
According to international standards, a country should have reserves equal to three months of import expenses under normal circumstances. However, if a country imports food, it has to keep more reserves. More reserves should be kept in case of global or domestic crises. As such, many people think that there should be a reserve equal to at least five months of import expenses.
Any disaster can be disrupted: Depletion of reserves can make it difficult to deal with any natural disaster, say analysts. Any kind of disaster will be difficult to deal with especially if the supply of dollars decreases. Apart from this, even if there is a natural or man-made disaster, the demand for dollars will increase, especially if there is a decrease in crop production for some reason, such a situation may arise. From July to November there is always a risk of disaster. Flooding can reduce crop production. Or in case of any other disaster, maybe donor organizations will come forward or emergency aid will also come. But to deal with the immediate situation, there should be adequate reserves.
Why is the reserve so low: Some economists say that some wrong decisions and policies of the central bank are responsible for the rapid decrease in reserves. In this regard, Professor Mostafizur Rahman said in the light of time, “There are some wrong policies and decisions of the central bank behind the decrease in reserves.” For example, holding the value of money for a long time is a big factor. In the past one and a half years, neighboring countries like India, Sri Lanka, Pakistan have regularly devalued their currencies, while in Bangladesh, the price of the dollar has been maintained at Tk 82-84 for a long time. After that, when the back was against the wall, it was taken at Tk 110-111 at a time. When it failed to budge, the central bank was forced to fix the price of the dollar at Tk 117 at once with a ‘crawling peg’. These initiatives should have been taken earlier.
Debt Repayment Reserves Will Decrease Further: In the past few years, the government has taken thousands of crores of foreign loans for big mega projects. Now is the time to repay that debt. The former governor of Bangladesh Bank and economist said that if the loan is repaid, the reserve will decrease further. Saleh Uddin said, “The grace period of foreign debt is coming to an end. Bangladesh will have to repay a debt of about $5 billion in the future. This amount should be paid from the reserve. As a result, if the reserves cannot be increased, then the crisis will intensify further. Apart from this, in the next three months, $5-6 billion will be needed to import machinery, raw materials and fuel that are very necessary for the industry. All in all, if the dollar does not come in the country at the rate that it will need, then the country’s economy will have to face a more difficult situation.
However, the two main sectors of dollar inflow – remittance and export earnings – the picture here is not very comforting either. Remittances are coming in large numbers through illegal channels or hundis. The dollar is being bought and sold at a much higher price in the country’s open market. Hundi is increasing. As a result, less dollars are being added to the reserves. Similarly, the export earnings also decreased. Due to these reasons, the pressure on the reserve has increased.
How to increase reserve: CPD’s Honorary Fellow Professor Mostafizur Rahman emphasized on two approaches, “to increase the reserve, remittances and export income must be increased, and first of all, hundi and money laundering must be prevented.”
Dr. Saleh Uddin said, “In addition to preventing hundi and taka smuggling and increasing export income-remittance, foreign investment should be brought. Especially in the country’s stock market now there is no foreign investment. This aspect should be given importance. At the same time, arrangements should be made to bring the loan commitments and grant commitments from various donor organizations and countries to the country quickly. Apart from this, the import of luxury goods should be prevented. Although the government is saying that the import of luxury goods is being controlled. We cannot see its reflection in reality. The proof of this is that many luxury goods including expensive cars are being imported every month. If this can be prevented, essential products can be imported with that dollar.