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Bangladesh - 2 weeks ago

How a country runs with ‘zero’ reserves

Enayet Karim: Foreign exchange reserves refer to the reserves of foreign currency assets held by a country’s central bank. The foreign currency collected in this way is mainly used to pay foreign loans, loan interest and import liabilities. For a developing country, central bank reserves are very important for imports and exports.
A country having zero reserves means no money to import commodities. In such a situation, the prices of all the daily commodities including food, medicine and fuel have increased. High inflation affects most people in that country. The financial strength of the government of the country with ‘zero reserve’ also runs out very quickly.
Generally, most countries hold their foreign exchange reserves in US dollars. Besides, European single currency Euro, Chinese currency, Japanese yen, British pound, Swiss franc are kept as reserves.
Basically, a country earns dollars by exporting goods and services. Besides, dollars also come to the country as remittances sent by workers working abroad. Foreign currency reserves are basically formed from that. Added to this are foreign debt and foreign direct investment.
A country’s foreign exchange reserves are not fixed or determinable, they can change at any time. But before the reserves are completely depleted, any country tries to borrow abroad to protect them. At the same time, the focus is on increasing export earnings and the income of expatriates living abroad. If good results are obtained in this case, a country is saved from becoming ‘bankrupt’ with zero reserves.

Meanwhile, the Russia-Ukraine war has been going on for a long time. Then the Israel-Hamas war started recently. As a result, the global economy is in turmoil. The prices of daily commodities around the world are going out of reach. Due to the sudden increase in import costs, the foreign exchange reserves of various countries have been strained. Bangladesh is no exception.
A country’s government pays its own debt through revenue and investment income. A country goes into debt when government spending is unbridled. Then the government has to borrow more. Government issues bonds to get loans. A bond promises to repay its interest and principal at maturity.
A country’s borrowings from both domestic and foreign sources are combined – the national debt. Most external debt is denominated in foreign currency through government-issued bonds, which are bought by foreign investors. On the other hand, the internal debt can be taken by the government from the commercial banks of the country or through the issue of bonds among the people.
Interest and principal repayments on domestic debt are made from government budget allocations. That is why the government often prints more money or increases the scope of taxes. However, external debt is a major danger, which is why the budget has to reduce the allocation to other revenue-raising sectors and keep that money for debt repayment. This loan has to be repaid in foreign currency, over which the government has no control.
The economic turmoil has also affected Bangladesh. Dollar crisis has been going on in the country for a long time. In such a situation expatriate income is not coming as expected. As a result, the crisis is getting worse and worse.
Bangladesh has to pay import duty every two months. As a result, the reserves are continuously decreasing. In this, the concern about the reserve is not increasing. According to the data of Bangladesh Bank, the record of August 2021 was $48 billion. In just two and a half years, the grace reserve came down to $23 billion. And the expendable reserve is about $13 billion, which is less than the import bills for three months.

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