Bangladesh forex reserves sink below $36 billion despite spending restrictions
Bangladesh’s foreign currency reserves have dropped below $36 billion, 28 months after crossing the mark, despite the government’s austerity measures to save dollars, bdnews24.com reports. According to the Bangladesh Bank, the reserves stood at $32.48 billion in December 2019 and
Bangladesh forex reserves sink below $36 billion despite spending restrictions
FE ONLINE DESK | Published: October 21, 2022 11:12:07 | Updated: October 21, 2022 11:46:40
Bangladesh’s foreign currency reserves have dropped below $36 billion, 28 months after crossing the mark, despite the government’s austerity measures to save dollars, bdnews24.com reports.
According to the Bangladesh Bank, the reserves stood at $32.48 billion in December 2019 and they began rising afterward. The reserves reached $48 billion, a record highest for the country, in August 2021 before the fall began.
Bangladesh’s export earnings and inward remittances are declining as inflation has gripped the global economy amid the war between Ukraine and Russia.
Bangladesh’s reserves last topped $36 billion in June 2020. Now they stand at $35.98 billion.
It steadied at $40 billion for some time and stood at $41.82 billion in June this year, four months after Russia invaded Ukraine.
The economy regained some pace after the coronavirus cases slowed down. As the import demands rose, so did the duty due to the rising cost of fuel and transportation worldwide.
The import expenditure surpassed export earnings and remittances pulling at the dollar reserves and forcing Bangladesh to begin devaluing the taka against the dollar.
In August last year, dollars were priced at Tk 84.8 whereas it soared to Tk 104.87 as of Oct 19. It is being sold at Tk 112 in the open market.
Bangladesh imposed strict curbs on imports to save up dollars. The central bank issued restrictions on bringing in luxury goods. The cash margin for the import of non-essential goods was increased from 75 to 100 percent.
The national bank also mandated a requisite for approval before banks issue letters of credit for imports worth $30 million or more while costs of import-reliant projects were reined in.
Yet the trade deficit and current account balance kept widening. Bangladesh looked at a trade deficit of $4.5 billion in August this year, while the current account balance was behind by $1.5 billion.
However, the restrictions saw a drop in new LCs being opened but the country is still behind in paying for the previous LCs.
On Oct 16, Bangladesh Bank Governor Abdur Rouf Talukder said the import liability will be met with export earnings and remittances at the end of the month.
The exporters also became cautious about shipping out goods to countries struggling with deficit in the current account balance.
Bangladesh has already requested loans worth $5.5 billion from the World Bank and the International Monetary Fund for support. A team from the IMF is set to arrive on Oct 27 to discuss the terms of the loan.
Bangladesh is due to meet import liabilities to Asian Clearing Union in November as part of a bimonthly repayment agreement, which will further lower the reserves.
Speaking to bdnews24.com, economist Ahsan H Mansur, executive director of Policy Research Institute of Bangladesh, advised the government to cut the exchange rate of taka against the dollar a bit more to encourage remittances and exports.
To control inflation, the government can raise the cap on interest on bank loans from 9 percent, he said.
The Bangladesh Bank formed the Export Development Fund with $8 billion from the reserves. It calculates this fund while counting the reserves. But the IMF disagrees with the method and wants it shown separately, which could lead the reserves to fall significantly.
According to international standards, a country needs foreign currency in stock to meet at least three months of import expenditure. With the current reserves, Bangladesh can afford four months of import bills.
In line with the method suggested by the IMF, Bangladesh does not have enough money in reserves to meet imports for four months.
