Data from Bangladesh Bank shows why Forex reserves have gone down so much recently, with multiple factors like deferring payment during covid, higher cost of imports, lower export revenue and the devaluation of the taka to name a few.
On August 24, 2021, Bangladesh's reserves reached their highest level of $48.06 billion. However, on October 19, barely 14 months later, they fell to a record-low $35.98 billion, which is the lowest in 28 months and the lowest since June 30, 2020.
The reserves were $46.19 billion in October, just one year prior.
Due to the greater import payments in comparison to the slower-than-expected export revenues, $60 million from the foreign exchange reserves of Bangladesh Bank was sold to the banks on that day.
Bangladesh Bank already has sold a total of $4.5 billion dollars in this fiscal year.
Data analysis shows that the country's foreign exchange reserves have grown despite the fact that Covid-19 saw a worldwide economic shutdown.
Despite the drop in exports during that period, remittances rose, while imports fell.
Additionally, the payment of import bills and loan installments has been largely postponed.
As a result, as the reserve grew, so did the liability.
The aftermath of the pandemic started to put pressure on the dollar market six to seven months before the Russia-Ukraine war (the invasion began on February 24), and the war only made the situation worse.
According to economists and bankers, the increase in reserves caused by hazardous short-term loans was unsustainable, which is why it was unable to withstand the pressure.
Economists say that the warning signs were present long before the Russia-Ukraine conflict, particularly after the epidemic, despite the fact that it has disrupted the economies of most countries, including Bangladesh.
Salehuddin Ahmed former governor of Bangladesh Bank told Dhaka Tribune that the economic crisis brought on by war, political unrest or natural disasters started suddenly. But the crisis that occurred due to managerial errors had been a long time in the making.
“The crisis in Bangladesh is not only due to war, but became more visible because of it. It was already there and dealing with this crisis will not be possible with only loans.
“Production should be increased as well and imports should be reduced further,” he added.
“If you observe carefully, the foreign exchange crisis that would occur in Bangladesh at some point was already foreseen five to six years ago. Persistent current account deficits, large trade deficits, and increasing liabilities over foreign assets are nothing new. If we were careful with these matters earlier, there would not be such a crisis now,” he explained.
“Neglecting those crises can lead to major disasters, as it happened in Sri Lanka,” he also added.
According to a recent central bank report, expenditure has been increasing more than foreign exchange earnings for the past few years.
Short-term loans in foreign currency have been taken to meet the deficit and reserves have been artificially inflated by using loan money to meet external liabilities with a large share of remittances and export earnings.
The report shows the foreign currency assets in 2018 were $8.81 billion and liabilities were $7.72 billion dollars.
In 2019, as reserves increased, so did assets and liabilities at the same time and during that year, assets were $14.73 billion and liabilities were 13.89 million dollars.
In 2020, liabilities were $18.46 billion against assets worth $20.09 billion, whereas, in the following year, liabilities stood at $22.76 billion against assets of $24.36 billion.
Assets have increased by 177% in the last four years. On the contrary, liabilities have increased by 195%.
Meaning, the amount of debt has increased more than the foreign currency deposits during this period.
The former governor also suggests that it is important to stop money laundering, and by increasing market supervision, product price should be kept at a reasonable level as much as possible.
To increase domestic demand, employment should be created through small industries. Big industries cannot be allowed to go bankrupt and creating alternative export markets is also important.
