Sharmin Nahar Nipa :
Bangladesh’s foreign exchange reserve is under severe strain, owing to the increasing current account and trade deficits and declining inflows of remittance. The country’s trade deficit hit a historic high of $ 30.81 billion in the first 11 months of the last fiscal year (FY 2021-22) year according to data from the Bangladesh Bank.
The higher trade deficit also registered a record current account deficit of $ 17.23 billion in the first 11 months of FY22 in contrast to a deficit of $ 2.78 billion a year ago. Besides, between July and May last fiscal year, imports increased to $ 75.40 billion, up 39 per cent year-on-year when exports grew 33 per cent to $ 44.58 billion.
Such a situation has created a tremendous pressure on the foreign exchange reserves, prompting a cash dollar crisis in the banking sector. The central bank supplied a record $ 7.47 billion to the market between July 1 and June 28 last fiscal year to ease the dollars crisis.
Despite the fact, the inter-bank exchange rate still remains highly volatile due to the inadequate supply of the greenback.
Recently, the country’s foreign exchange reserves declined to $ 39.77 billion. This is the first time in two years that the reserve dropped below the $ 40 billion mark, according to the central bank data. Analysts estimate the central bank’s latest reserves can cover imports for four months if the current trend of import continues. Stating the depleting foreign exchange reserve a warning signal for economy, thy apprehend that reserve may drop further in the days to come as a result of high import payment, falling inward remittance and export earnings.
With reserves dwindling, the Bangladesh government has already moved forward with curbing non-essential imports, relaxing rules to attract remittances from millions of migrants living overseas and reducing foreign trips for officials.
The inward remittance, which helps to build the country’s reserve, shows a fall in FY22 to $ 21.03 billion from $ 24.77 billion in FY21. Bangladesh did not receive the remittances as expected despite a massive surge in outflow of Bangladeshi migrant workers. Analysts are of the view that remittance inflow to Bangladesh continue to slide as money transfers through unofficial channel (like hundi) might have gathered pace in the wake of high dollar rates in the ‘kerb market’. Currently, the government has been providing 2.5 per cent cash incentive on remittance to encourage migrants to use proper channels to send money home. Analysts urge the government to increase the incentive further to boost the country’s foreign exchange reserve.
Moreover, in a bid to boost shrinking forex reserves, the Bangladesh Bank (BB) in the recent months has taken various measures including relaxed rules to woo more remittances from millions of Bangladeshi people living and working abroad. The central bank has withdrawn fixed U.S. dollar-taka exchange rate, allowing the market to set the price based on demand and supply. The BB move aimed at restoring stability in the foreign exchange market after the central bank’s related measure did not yield much effect.
Moreover, the falling reserve also led to a significant devaluation of the nation’s currency against the US dollar. Taka has been devalued by 11.38 per cent in a year. Besides, dollar price remained upward amid rising demand.
Amid the appreciation of the dollar and price spiral on the global market, the country’s inflation hit a nine-year high of 7.56 per cent in June due to the spiraling prices of food products in the country.
Analysts, however, said, the country needs quick foreign currency inflows to meet import and debt payments amid falling foreign exchange reserves. They said that the government should offer more incentive to overseas workers so that they prefer to send their hard earned money through formal channels.
They said multi-agency efforts are needed to boost export and attract FDI. At the same time, big project which have been implementing at the cost of foreign exchange should be halted to keep the reserve stable.
Bangladesh’s forex reserve was nearly $ 30 billion at the end of FY2018-19. A year after, in June 2020, it was $ 36 billion which turned to $ 46 billion in June 2021.
However, IMF said, the foreign exchange reserve of $ 46 billion as reported at the end of June last year was overstated by 15 per cent. Bangladesh Bank has overstated its foreign exchange reserves by $ 7.2 billion through inclusion of non-reserve assets underestimating related risks, said IMF. In a report on safeguards assessment of the Bangladesh Bank for 2021, the IMF identified the misclassification of foreign assets leading to an inflated foreign reserve held by the central bank.
The non-reserve assets that IMF identified are- foreign currency loans to local banks– $ 6198 million, deposit with state-owned local banks–$ 651 million, deposits with ITFC (IDB Group)– $ 288 million and fixed income securities below investment grade– $ 60 million.
((Sharmin Nahar Nipa is Senior News and Programme
Presenter, Bangla TV).
