Reserve risk increasing due to policy mistakes

Farhad Chowdhury: Export earnings are running dry. Same is the case with remittance. As these two main routes of dollars coming into the country are narrow, the reserve has been strained. In this scenario, banks should have encouraged expatriate workers to enrich reserves by increasing remittance flows. But instead of doing that, they are sitting to easily buy dollars from the central bank. The central bank is also providing dollars to them. This increases the risk in the reserve.
According to the data of Bangladesh Bank, the central bank has sold about $3.5 billion from the reserves in the last three months. Last sold $80 million yesterday. As a result, according to the IMF, the reserve has reached $21.05 billion. The way things are going, experts see no sign of the dollar crisis abating anytime soon.
In this regard, the former governor of Bangladesh Bank Salehuddin Ahmed said, “Reserves are decreasing, but it does not make sense to sell dollars. This should be stopped.” The reserve should be increased in a legitimate way with a concerted initiative to ban hundi. This will not happen anytime soon. It will take at least a few months. That means if the reserve cost cannot be reduced, the deficit will increase in the future.
A major supply of dollars in the country comes from expatriate income (remittances). According to the latest report released by Bangladesh Bank, remittances through legitimate channels in the recently departed September was $1.34 billion, which is the lowest in the last 41 months. In September 2022, remittances to the country reached $1.54 billion. Accordingly, the remittance flow decreased by about 13 percent in September this year compared to the same period last year.
Analysts have blamed several reasons behind this decline in remittance flow due to the crisis. The biggest reason is the huge difference in dollar prices between banking channels and hundi. Expats get Tk 109 if remittance is sent through banking channel. And if they send it to Hundi without any cost, they get Tk 9-10 more against every dollar by paying the rest very easily, in less time.
Apart from this, some uncertainty surrounding the upcoming national elections is also one of the reasons for the decrease in remittance flow. Bangladesh Bank has recently announced the forward rate (booking rate) of the dollar. Some analysts see this as another reason for the decline in remittances. They believe that with this announcement of booking rates, expatriates will be more conservative in discounting the dollar in the hope of profiting later. If this happens, they fear that there may be a further shock to the flow of remittances.
There will be a dollar-crisis throughout the year 2023 says economist Dr. Ahsan H. Mansoor. The dynamics of the dollar and the reserve situation are now sending that message. When contacted in this regard, he told media, “At present, exports and remittances are not in a good position. Rice, pulses, oil etc. must be imported till election.
This will cause further shortage of reserves. However, the governor admitted that there is no way for the central bank to increase the reserves before the election, which has been revealed in the media. For this, a major change in the government’s policy should be made after the election. In this case, bank interest rate and foreign currency exchange rate should be increased. Also, different sources should be found to increase the income in dollars. If not, there is no doubt that further fall in reserves awaits.
Bangladesh is taking a $4.7 billion loan from the International Monetary Fund (IMF) to resolve the ongoing dollar crisis. The first installment of the loan has already arrived. But uncertainty remains as to whether the IMF will release the second tranche immediately as the conditions have not been met. If the IMF does not release the second tranche in November due to conditionality, the reserve situation could become more fragile.
In times of crisis imports have been tightened to save dollars. At one time the import bill was over $8 billion. Later it gradually decreases. An import bill of about 4.5 billion dollars was settled last June. However, the reserve is decreasing. From July onwards, import costs started to rise again. Bill settlement rose to $5.93 billion that month. In August and September, it remained at around 5.5 billion dollars. If it increases in this way, it will create more pressure on reserves.
Experts say that mainly Bangladesh Bank’s lack of timely decisions, frequent decision changes, not giving exemplary punishment to those involved in dollar manipulation, not giving competitive and attractive rates of dollars, not being able to motivate expatriates to send remittances to the country in a legitimate way, experts’ opinion since the beginning of the crisis. Taking into account the actions of the central bank has increased the crisis day by day.
In this regard, former World Bank official and economist Dr. Sadiq Ahmed told, ‘Bangladesh Bank is now paying the price for the mistakes of the last six years. They held the dollar. Made many mistakes. Now the correction is starting to happen. A lot of reforms need to be done here. Interest rates should be increased. If credit is readily available, traders will borrow and buy dollars for investment. This will increase the dollar-crisis. So, the loan interest should be increased. This will reduce the effect of money. Inflation will come down. Then the dollar rate will become bearable.
Bangladesh may have to pay about $14 billion in cash upfront, which was earlier allowed to be paid every two months, due to the recent ban on Akur transactions. Apart from this, the recently published data of Bangladesh Bank shows that the foreign debt status of the country in the fiscal year 2021-22 was $95.45 billion and in the fiscal year 2022-23 it was $98.94 billion, which has decreased in the current year. Again, the pressure of loan interest and installment payment is also increasing. This may also have a negative impact on dollar reserves.
Spokesperson and Executive Director of Bangladesh Bank Majbaul Haque, however, gave a message of hope. He said, “There is a dollar-crisis. Efforts to resolve it are ongoing. The reserves we have are above international standards. There is nothing to worry about it.