Forex reserve to stay in stress

As anticipated, foreign exchange reserves dipped below $40 billion and look set to stay under stress in coming months given the global market volatility and the rising trend in imports, overshadowing the export growth.

The total value of import letters of credit (LCs) opened during July 2021-May 2022 was $84.85 billion, which was 43.10% higher than that of the same period of the previous year.

There have been some declines in booking for rice, onion, fruits, pulses and even petroleum goods, but those were far from having a palpable impact due to the massive increase in LCs for wheat, edible oils, sugar, milk foods, fertiliser, apparel raw materials and capital machinery.

Some curbs have been in place to contain less-essential imports, but some major items cannot be checked to keep the market stable and industries running.

"We had to spend $9 billion more to import just eight products, including oil, wheat, fertilisers and gas. If their prices do not go down, the situation will be difficult to handle, because we have no control over them," said newly appointed Bangladesh Bank Governor Abdur Rouf Talukder on Tuesday, the first day of his taking over.

Though global food prices show a declining trend, analysts do not expect much comfort from it given the global market's volatile nature.    

As global market prices are still high, overall import bills are not coming down.

Next routine payments of Asian Clearing Union and selling of more dollars, if needed, to cool the currency market will erode the central bank's reserves further.

ACU payments

Bangladesh has to clear the import bills to the Asian Clearing Union (ACU) every two months. The Bangladesh Bank has to spend an average of $2 billion every two months on this payment.

According to the last six-month data of the central bank, the reserve is reduced by $1 billion per month thanks to the ACU payment.  

At the end of February this year, the reserve was $45.95 billion, which dropped to $43.89 billion on 6 March after clearing $2.16 billion ACU payment.

Two months later, $2.24 billion was paid to ACU on 10 May that pulled down the reserve below the $42 billion mark from $44.11 billion on 9 May.

The Bangladesh Bank paid $1.99 billion to ACU last week, as the reserve fell to $39.77 billion from June's $41.83 billion.

Dollar sales from reserve

The central bank is selling the US Dollar from the reserve almost every day to maintain the availability of the greenback. The central bank is providing dollar support in settling letter of credits for food and fuel import and government procurement.

The central bank sold the greenback worth a total of $7.62 billion in FY2021-22. However, the sales were not the same throughout the year. Dollar sales from reserves have picked up over the past couple of months.

In the first 13 days of the current fiscal year till Wednesday, $574 million was sold from the forex reserve. In other words, the central bank has been selling $1 billion a month, as the reserve stood at $39.70 billion on Wednesday.

What is the safe reserve?

Two decades back, a reserve able to finance the imports of three to six months was considered adequate, but the adequacy norms have changed. Now other factors like reserve as percentage of short-term debt, proportion of external debt, percentage of current account deficit are also considered.

The new governor said their goal is to take the reserves to a level enough for meeting the six-month import costs. 

A senior central bank official said the country's reserve once was $30 billion. But it is now $40 even amid the global crisis.

"We do not see any frightening situations right now. However, we are taking steps to reduce our imports as well as the costs. We are also working on how to increase the export and the remittance inflow," said the official.

Asked whether the import of specific products would be banned, the official replied in the affirmative. "If the situation turns ugly… time will say what steps we must take."   

Salehuddin Ahmed, former central bank governor and a noted economist, told TBS that the current reserve level cannot be labelled as alarming.  

"We have to have a reserve equal to the minimum three-month import payment, but we have more than that. But the reserve fall in a short span of time is a matter of concern. If the reserve continues to go down like this, it could be an issue for us in the future," he noted.

Noting that the emphasis should be on keeping the reverse at current levels, he said, "Taka should not be devalued further."

"If Taka is depreciated further, issues like import bills and production costs will compound. Exporters will get some benefits, but it will increase the money flow and fuel inflation," he said.

Salehuddin Ahmed stressed on trimming the import of less necessary items. He also called for verifying the repayment capacity of the private sector as he said the sector is availing a large chunk of foreign credits.        

"We should not default in repaying loans in the public and private sectors."

Prof Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), said the country even last year had a reserve to pay import bills for nine months, but it now fell to five months.    

"From that point of view, the reserve situation is of course concerning. But we need to consider commodity price hikes across the globe which have made imports costlier," he said.

Prof Mustafizur appreciated the government for widening the LC margin to 100% for import of some items, discouraging import of some products and letting Taka float freely against the US Dollar.   

He suggested opting for a ban on car imports if required. "This will reduce the revenue, but the government should focus on stabilising the balance of payment."    

Professor of economics at Dhaka University Dr Selim Raihan said widening trade deficit, huge pressure on reserve and foreign exchange have not been compensated by the export growth.

He appreciated that some policy measures were taken in the right direction-- efforts to contain imports and some adjustments in the exchange market, which, he believes, would give export and remittance a further boost.

"It's true that reserves dipped below the $40 billion mark, yet it is not like some other countries including Sri Lanka. We have taken some measures and some more measures are needed," he said, suggesting further adjustment in exchange rate, if needed, to offer some relief to forex reserve holdings.

There might have been some adjustments and readjustments in global fuel oil, food and commodity prices, but overall price levels are still well above their pre-war levels. "Global market is volatile and price pressure will continue for energy, food and other commodities.

So there is no room to think that the situation is going to be normal," he warned.

Though LC margins have been raised for non-essential items, additional duties or even temporary import restriction can be imposed if situation demands in future, suggests Prof Selim Raihan, executive director of Sanem, a local think tank.

"We have to leave behind the feeling of complacency about the reserves and policymakers should not be in a comfort zone any more so that we would never fall into crisis," he said, urging more vigilance and effective implementation of import-curbing measures.

He also referred to the IMF's earlier question against incorporating $7 billion export credit into forex stock. "There is a dilemma: is our reserve $40b, or it is $33b?" he pointed out.