Bangladesh Bank's foreign currency reserves are not stabilizing, despite several measures, including import controls, while the declining trend has also led to uncertainties in actual reserve calculations.
The central bank reports that the current reserve stands at close to $27 billion. However, this figure is debatable, with some economists arguing that it is even lower.
Dr Debapriya Bhattacharya, a member of the Board of Trustees at the Centre for Policy Dialogue (CPD), said that the figure from the central bank is a warning for the country's economy.
“At present, our foreign currency holdings are less than the value of three months' imports, marking a concerning economic indicator,” Dr Bhattacharya said, highlighting a few sectors already facing risks.
He also suggested that it might not be feasible to import goods as required due to the diminishing reserves.
Something beyond knowing is happening
Zahid Hussain, former lead economist at the World Bank's Dhaka office, recently claimed that Bangladesh's current and net forex reserves stood below $18 billion.
Speaking to reporters after the conclusion of the annual conference of the International Business Forum of Bangladesh (IBFB) on Wednesday, the economist also commented that there is more happening with the reserves than what is being made public.
He pointed out that the current inflow and outflow of foreign currency do not match the reserve figures, and the reserve is decreasing due to the trade balance deficit.
Although the country’s reserve level has not yet reached an alarming state, it is concerning, he remarked.
Zahid Hussain mentioned that the foreign currency reserves are decreasing by $1 billion every month and, if the trend continues, they will eventually deplete.
He noted that the reserve figures have been negative for quite some time, suggesting “something beyond knowing is happening”.
Bangladesh Bank and its own discrepancy
While Bangladesh Bank states that, according to the IMF's calculations, the reserves are currently within the $20 billion range, a reliable source from the bank suggests that the actual reserve is less than $17 billion.
On August 24, 2021, Bangladesh Bank's foreign currency reserve was more than $48 billion. Now, that reserve has decreased to $26.74 billion.
According to the International Monetary Fund's (IMF) Balance of Payments and International Investment Position Manual (BPM6) accounting system, the foreign currency reserve currently stands at $20.90 billion.
There is another net or actual reserve calculation at the central bank, which is only disclosed to the IMF and not made public.
Sources from the IMF indicate that, by this calculation, the country's actual reserve is now nearly $17 billion.
According to Bangladesh Bank data, the reserve has decreased by an average of $1 billion every month over the past two years.
IMF’s concerns
Bangladesh Bank, apart from settling government loan instalments, service charges, and fees, is selling dollars from its reserves to other banks for various government imports, which has led to a consistent decrease in the reserves.
In the first quarter of the ongoing fiscal year, Bangladesh Bank sold over $3 billion. In the 2022-23 fiscal year, sales amounted to $13.58 billion, and in the 2021-22 fiscal year, it was $7.62 billion.
Under the terms of the $4.7 billion IMF loan, the actual reserves were supposed to be maintained at $24.46 billion last June and $25.30 billion in September. By December, the reserve should reach $26.80 billion.
However, Bangladesh Bank is failing to maintain the reserves as per these conditions.
According to the IMF's BPM6 accounting system, the actual reserve is calculated after excluding liabilities to the Asian Clearing Union (ACU), foreign currency clearing accounts held by banks, and the Special Drawing Right (SDR) dollar accounts.
Overall, it appears that, in line with IMF standards, Bangladesh lacks adequate reserves.
Currently, an IMF delegation is visiting Bangladesh, and one of their primary discussion points revolves around addressing the reserve depletion and reviewing the conditions' fulfilment.
Dwindling reserves amid reduced inflows
Typically, banks receive dollars from sources such as remittances, export earnings, freelancers' income, private institutions' loans and grants.
If commercial banks have a surplus of dollars, they sell it to the central bank.
Additionally, the Bangladesh Bank's reserves grow directly from various government loans, grants, and the income of personnel engaged in UN peacekeeping missions.
However, remittance and export earnings have declined, and there is no positive news about foreign loans or direct investments, indicating a strain on all dollar sources.
On the other hand, the repayment of foreign loans has increased, coupled with higher interest rates, leading to reduced dollar inflow and increased outflow.
This situation has intensified the pressure on the reserves. Over the last year, Bangladesh Bank's reserves have diminished by $10 billion.
Dollar crisis deepens
The decline in reserves primarily started after Russia's attack on Ukraine in February last year, sparking a dollar crunch due to rising global commodity prices.
Over the past eighteen months, the dollar's rate has surged from Tk88 to Tk110.
Following the advice of Bangladesh Bank, the Bangladesh Foreign Exchange Dealers' Association (Bafeda) and the Association of Bankers, Bangladesh Limited (ABB) have been periodically setting the dollar's price based on supply and demand.
As the official rate of the dollar is increasing monthly, it has been set at Tk110 for export and remittance income this month, while banks are selling to importers at Tk110.50.
However, transactions at this rate are infrequent in reality, leading to an increase in unofficial foreign currency dealings.
Remittance dip
Remittances experienced a significant decline recently, with only $1.34 billion entering Bangladesh in September.
This is the lowest monthly inflow in the past 41 months.
Compared to September last year, there is a decrease of $195.9 million, marking a 12.72% drop.
August also saw a decrease of 16%, with inflows amounting to $1.59 billion, whereas the previous year's August had an inflow of $2.03 billion, indicating a 21.48% reduction.
Amid foreign exchange challenges at Bangladesh Bank, the country's deepening dollar crisis is further impacting its economic stability due to the remittance decline.
Although remittances were notably lower in April and May, June saw an uptick with an inflow of $2.20 billion, largely because of the Eid festivities.
However, it started decreasing again after that.
Experts in the banking sector believe the rise in money transfers through hundi is a significant reason for the dip in remittances.
This illegal transaction means that a considerable portion of the foreign earnings, primarily sent by expatriates, is not officially entering the country's foreign currency records.
Central bank's diverse reserve investments
A significant portion of the central bank's reserves is held in dollars, amounting to approximately $18.45 billion. This is a notable reduction from $31.90 billion in June of the previous year.
Apart from dollars, the reserves also include investments in euros, pounds, Australian, Canadian and Singapore dollars, Japanese yen and Chinese yuan.
Additionally, the bank has purchased gold valued at $860 million, up from $820 million as of June last year.
Beyond just holding reserves, Bangladesh Bank has also allocated funds for various expenditures. For instance, it has established an export development fund, currently valued at $3.7 billion.
There are other allocations in the Long-Term Fund (LTF) and Green Transformation Fund (GTF).
Funds have also been provided to Sonali Bank Limited for the acquisition of aircraft for Biman Bangladesh Airlines and the Payra Port project.
