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Dhaka Tribune

Economists: Bad policies behind depleting forex reserves

In the first 20 days of October only $1.25 billion in remittance came through banking channels

Update : 27 Oct 2023, 12:31 AM

The country's usable foreign exchange (forex) reserves have dropped to $16.7 billion, which means 3 months' worth of import liability can be met with it.

Economists in the country blame the wrong policy of Bangladesh Bank for such a downward trend of reserves.

In the first 20 days of October, $1.25 billion in remittance came through the banking channel.

In September, expatriates sent home $1.34 billion, down 12.7% year-on-year and a 41-month low since April of 2020, when $1.09 billion came in, according to data from the Bangladesh Bank.

But according to the central bank, the forex reserve figure is close to $27 billion.

Contrary to the central bank's claim, the International Monetary Fund (IMF)'s prescribed balance of payments and international investment position manual (BPM6) formulates that it is below $21 billion.

If the liability of $4 billion is removed from that, the usable reserves are only $17 billion, approximately $16.7 billion.

Data shows letters of credit (LCs) opened in the first 3 months of the current FY24 was about $16 billion.

As such, the average was $5.33 billion per month. That means, only 3 months of impost liability can be met with the reserve money.

Zahid Hussain, lead economist consultant at the World Bank Dhaka office said: “With this reserve, we can cover three months of import costs. But to achieve the target, it must be increased.”

“If we adopt tighter monetary policy now, reserves will fall further, since import bills have to be paid, alongside other debt that must be repaid,” he explained.

Regarding Bangladesh Bank’s bad policy, Prof Mustafizur Rahman, distinguished fellow of the Centre for Policy Dialogue (CPD) said: “For a long time we have maintained the exchange rate at Tk86. Now its cumulative effect is upon us at once. As a result, the Taka suddenly and sharply depreciated against the US dollar.”

That did not happen in other countries, because they maintained their currency rate according to the market, he further explained.

Bankers said that various initiatives taken by Bangladesh Bank to increase the reserve are not working because of the big difference in financial account and current account balances.

They also added that the growth in dollar holding by banks was not substantial enough to fully avert the ongoing dollar crisis on the financial market.

As there is shortage of dollars, many import payments were delayed or renegotiated, giving banks more time to acquire the necessary foreign currencies.

On the contrary, more than $1 billion has to be sold from the reserve every month to meet the rising demand.

The Bangladesh Bank  sold about $13.5 billion to banks in FY23 and $3.75 billion in July-September while it had injected $7.62 billion into the financial market in FY22.

July-August

Earlier gross foreign currency balance with the banks advanced to $6,174 million in August from $5,900 million in July.

The gross balance in August 2022 and December 2022 were $4,904 million and $4,795 million respectively.

However, inflow of remittances dropped by 13.55% to $3.57 billion in July-August of FY24 compared with that of $4.13 billion in the same period of the previous financial year.

Export earnings increased to $9.37 billion in the July-August period from $8.6 billion in the same period in the past year.

Starting from April 2022, the government and the Bangladesh Bank embarked on a series of initiatives to curb surge in imports, which had been adversely impacting foreign currency reserves then.

The measures included import restrictions on luxury items and non-essential products, which in turn, have contributed to the recent growth in dollar reserves, bankers said.

As a result of such measures, import payments in the financial year 2022-23 decreased by 15.76% to $69.49 billion compared with those of $82.49 billion in the financial year 2021-22, according to Bangladesh Bank  data.

Moreover, imports declined by 22.30% in July-August of FY24 compared with those in the same period of the previous financial year.

Import cost was $9.863 Billion in July-August period of FY24, which was $12.692 billion in the same period of FY23.

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