• Friday, Oct 02, 2020
  • Last Update : 12:21 am

Experts: Using forex reserves to fund development is not feasible

  • Published at 09:11 pm July 7th, 2020
Zahid Hussain and Ahsan H Mansur
Economists Zahid Hussain and Ahsan H Mansur Dhaka Tribune

They have said the current $36 billion forex reserves are essential during the pandemic situation as the remittance outlook remains bleak

Top economists are of the view that borrowing from foreign currency reserves to bankroll large projects or implement the budget is not feasible, as the practice will discourage foreign lenders and foreign direct investment (FDI) regarding involvement in Bangladesh.

They have said the current $36 billion forex reserves are essential during the pandemic situation as the remittance outlook remains bleak.

Instead of the traditional belief of keeping three months’ import bill equivalent reserves, economists say the current situation demands preserving seven to eight months’ import equivalent foreign currency to meet any emergency needs.

Prime Minister Sheikh Hasina on Monday at the meeting of the Executive Committee of the National Economic Council (ECNEC) directed the relevant departments to explore possibilities of utilizing reserves for the betterment of the economy and implementation of major infrastructure projects.

The surging inbound remittance and enhanced aid from developing partners contributed to a rise in forex reserves to $36.14 billion on July 02.

A senior Bangladesh Bank official says countries use foreign currency reserves to keep a fixed rate value, maintain competitively priced exports, remain liquid in case of crises and instill confidence in investors. The reserves are needed to pay off external debts and profit from a diversified portfolio, he adds.

Opposing the idea of using reserves to finance the budget or large projects, he says current reserves are   needed to meet the country’s external obligations. These include international payment obligations, including sovereign and commercial debts,  financing of imports and the ability to absorb any unexpected capital movements.

Talking to Dhaka Tribune, the World Bank’s Dhaka office former lead economist Zahid Hussain said forex reserves were the important weapon in disaster management and market confidence. The proposal to use foreign exchange reserves for investment in infrastructure must be examined cautiously, he added.

He stated that forex reserves were an important weapon to handle emergency situations, as adequate reserves should be maintained in difficult situations like the coronavirus pandemic ravaging global economies at present. 

The economist has his questions about the definition of adequate reserves.

“Adequate reserves are required to meet the three-month import bills in a normal situation.  But reserves should be maintained to cover seven to eight months of import bills during the current dire situation,” explained Zahid Hussain.

He noted that the current account deficit had been increasing since February and the increasing trend of the deficit would continue in the coming days as there was little prospect of a speedy economic recovery. 

The growth in remittance was not very high in any month except June and the momentum would not continue in the coming months as a huge number of foreign expatriates had become jobless, he added.

The inflow of remittances declined by 1.42% to $8.79 billion in the first half (January to June) of this year as the Covid-19 pandemic battered most global economies.

Zahid Hussain further said that foreign lenders typically observed the forex reserves situation of a country, as healthy reserves influenced their decisions in a positive way.

If foreign lenders thought it was risky they reduced the terms of the credit and increased the risk premium, he added.

Ahsan H. Mansur, Executive Director of Policy Research Institute of Bangladesh, speaking on the issue, said there was no logic or legal basis for using reserves.

“The government has no need to use dollars from reserves, although money is needed to implement the budget and implement mega projects,” Mansur,  who is also the chairman of BRAC Bank, told Dhaka Tribune.

He said the very idea of using forex reserves was not feasible, with the current situation being so dire that it required buffer reserves to address emergencies and satisfy foreign lenders, overseas investors and global credit rating agencies.

Foreign exchange reserves of all countries in the world are assets of their central banks. The reserves of Bangladesh are managed in accordance with the Foreign Exchange Regulation Act 1947. 

The country’s foreign exchange reserves stood at $36.14 billion as of yesterday. Of the figure, gold worth $700 million is deposited in the Bank of England, the central bank of the United Kingdom, sources in the BB have said.

The rest of the reserves are in currencies such as the US dollar and the euro, as a good chunk of them are invested in the Federal Reserve, the US central bank, and in other banks in the world.

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