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Bangladesh - Bank & Finance - November 29, 2023

Reserves fell at danger level

Zarif Mahmud: The foreign exchange reserve at the moment is at a danger level of about $15 billion, which is less than the bill of three months imports. Economists said, if Bangladesh fails to boost the reserves at $ 19 billion in the end of December, the country to be at high-risk danger.
The dollar crisis that started in the country after the start of the Russia-Ukraine war has not yet ended. Bangladesh Bank’s account of foreign exchange reserves published last week is much lower than usable reserves. According to the sources of the central bank, the amount of usable reserves is now about$15 billion.
Since 2022, consumption in the energy, consumer goods and transportation sectors has increased globally due to the Ukraine war. As a result, like other countries, the import cost of Bangladesh increases much more than before. However, compared to that, the flow of foreign currency in the country has not increased. The increased demand for dollars for imports creates pressure on foreign exchange reserves. Because, the central bank has to sell dollars from the reserve to meet the liability of importing various products including emergency fuel, food products, chemical fertilizers.
IMF advised Bangladesh Bank to properly account for reserves. According to Central Bank sources, the usable reserves of the country are now less than $16 billion.
In August 2021, the reserve of Bangladesh Bank was $48 billion. According to the latest from the central bank, it has decreased to $25.16 billion. However, according to International Monetary Fund (IMF) BPM 6, the reserves amount to $19.52 billion. Bangladesh Bank published this information on the website last Wednesday. But not all of this money is usable. IMF advised Bangladesh Bank to properly account for reserves. According to Central Bank sources, the usable reserves of the country are now above$15 billion.
Bangladesh Bank’s former Chief Economist Mustafa K Mujeri told that the reserve has fallen to a level that is not critical but worrying. A maximum of three months of import liabilities can be met with usable reserves. It is also retained through forced import controls. Otherwise, it would have decreased further. There is no need to artificially manage foreign exchange. This market should be allowed to run at normal speed. Then the price will rise slightly and then return to normal. Then the reserve will increase again.
Mustafa K Mujeri also said that now the dollar price has risen to Tk 125 in the open market. As a result, some people are buying dollars at this price, doing hundi at this price. The entire expatriate income is not coming to the country through legal means. Through which money is being laundered again. Again, money is being laundered through other means. The government has not been successful in bringing back the smuggled money, nor has it been able to stop the smuggling. As a result, the crisis in the economy is now multifaceted. Looking at the current situation, it seems that this crisis is unlikely to end soon.
The level at which the reserves have fallen is alarming, if not critical. A maximum of three months of import liabilities can be met with usable reserves. It is also retained through forced import controls.
According to Section 7/O of the Bangladesh Bank Order, 1972, the central bank has jurisdiction over the holding and management of foreign exchange. Reserves act as a safeguard for payment of foreign exchange liabilities of various countries i.e. import liabilities. As per internationally accepted norms, a country is generally required to hold three months’ worth of foreign exchange reserves.
According to the information released by Bangladesh Bank, as of last Wednesday, foreign exchange reserves were $19.52 billion according to BPM6. The total reserve that day was $25.16 billion. Reserves dipped below $25 billion last week, but rebounded to over $25 billion as global gold prices surged. The reason is said to be that Bangladesh Bank has invested the reserve money in various bonds, currency and gold abroad.
Reserves did not cross the $2 billion level until the 2001-02 fiscal year. But after that the reserve gradually increased. In the 2008-2009 financial year, when the global recession hit, the reserves fell from seven billion to five billion dollars.
According to BPM6, reserves are shown at $19.53 billion, but the country’s usable or real reserves are even lower. Because, from that reserve, more than $2 billion in the SDR sector of the IMF, more than $1 billion in foreign currency clearing of the banks and about $500 million in the Asian Clearing Union or Akur bill will be removed. As a result, if these liabilities are excluded, the actual usable reserves are slightly less than $16 billion dollars. Analysts say there is no pressure to pay off the IMF’s debt quickly.
In Bangladesh, the reserve in the fiscal year 1994-95 was $3 billion or a little more than $3 billion. In the fiscal year 1996-97 it came down to $1 billion. Reserves did not cross the $2 billion level until the 2001-02 fiscal year. But after that the reserve gradually increased. In the 2008-2009 financial year, when the global recession hit, the reserves fell from seven billion to five billion dollars. It gradually increased thereafter and the total reserves exceeded $48 billion in August 2021 when imports fell due to Covid and there was a big surge in expatriate income.
Still, the central bank is selling dollars from the reserve to meet the government sector’s obligation to import food, fuel, chemical fertilizers. Apart from this, foreign loans and subscriptions are also paid from the reserves.
How reserves decrease
Foreign exchange reserves are assets of the central bank. However, the term reserve has been used in different ways in political decisions. Initiatives were also taken to provide loans to the private sector from the reserves, which were later discontinued.
The main source of Bangladesh Bank’s reserves is the purchase of surplus dollars from expatriate and export earnings banks. Apart from this, money received from foreign loans, investments, grants are directly added to the reserve. Besides, the income of the various forces of Bangladesh working in peacekeeping missions in the United Nations is also directly added to the reserve.
On the other hand, Bangladesh Bank sells dollars when demand increases. This is the reason why reserves have declined the most in the last two years. Still, the central bank is selling dollars from the reserve to meet the government sector’s obligation to import food, fuel, chemical fertilizers. Apart from this, foreign loans and subscriptions are also paid from the reserves. Apart from this, every two months, Bangladesh Bank pays the import liabilities of Akur member countries. However, the banks deposit this deposit with the central bank on a regular basis, which the company repays at once.
The dollar-crisis that has been going on for a year and a half has not ended yet. Due to import controls, import costs fell to $5.27 billion in September, which is about 27 percent lower than the same period last year. Businessmen say that they are still not getting the required dollars to open loans. Again, many entrepreneurs have to buy dollars at a price Tk 12-13 higher than the declared price. Meanwhile, exports in October last year decreased by 13.5 percent to $3.76 billion compared to the same period of the previous year. However, the expatriate income has increased by almost 30 percent in the last month, reaching $197 million.
However, some indicators of dollar supply and consumption have improved recently. There was a current account surplus of $890 million in the July-September period, compared to a deficit of $367 million in the same period last year. It is said that this improvement has been due to banks paying off short-term liabilities and reducing imports. However, the fiscal deficit still remains.
Bangladesh Foreign Exchange Dealers Association (BAFEDA) and Association of Bankers Bangladesh (ABB) have been fixing the dollar price since September last year. Recently, the two organizations have decided to reduce the price of the dollar by 50 paise. Bangladesh Bank has supported this decision as correct.
According to their decision, the price of the dollar to buy expatriates and export earnings is now a maximum of Tk 110, and 50 paise per dollar to meet import liabilities of Tk 110. However, in addition to the government’s 2.5 percent incentive on expatriate income, banks can also give the same amount of incentive. As a result, the beneficiaries will receive a maximum of Tk 115.50 paisa per dollar if the expatriate income is sent. However, banks are buying expatriate income at a price of more than Tk 121 without incentives. Selling dollars to importers at higher prices.
Bangladesh Bank spokesperson Majbaul Haque said in a press conference last Wednesday that last year’s short-term foreign debt liability was $1,600 billion, now it has decreased to $6.9 billion. Besides, there is a surplus of $1 billion in current account. Now the loan is opened with immediate dollar payment. As a result, no future liability is created. In addition, the supply of dollars in banks is now greater than the demand. In the future, there will be more foreign borrowing, which will increase the reserves.

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