Govt tightens belt to relieve reserve
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The Business Standard
THURSDAY, MAY 19, 2022
THURSDAY, MAY 19, 2022
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Govt tightens belt to relieve reserve

Economy

TBS Report
11 May, 2022, 03:15 pm
Last modified: 12 May, 2022, 05:05 pm

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Govt tightens belt to relieve reserve

The foreign currency reserve falls to $41 billion as war-led economic turbulence started discomfiting Bangladesh

TBS Report
11 May, 2022, 03:15 pm
Last modified: 12 May, 2022, 05:05 pm
Govt tightens belt to relieve reserve

Amid concerns over the foreign currency reserve, Bangladesh is set to shelve low-priority development projects and suspend foreign tours for officials – the second round of belt-tightening after the pandemic.

"We are postponing projects that require foreign currencies while the delayed implementation will not hurt the economy eventually," said Finance Minister AHM Mustafa Kamal Wednesday.

In other words, the austerity measure means the government will not undertake costly but low-priority projects like making a new road, constructing or repairing a building or buying new cars now, according to ministry officials.

The government's cautionary spending measures meet with appreciation from economists and policy analysts.

Key factors that compelled the government to come up with the decision include spiked import cost overpassing the export earnings, gradual fall in remittance until recently and dwindling foreign loans and grants for Covid management. All these points helped the country's foreign currency reserve fall to $41 billion, which was at $48.6 billion in August last year.

"The global economic situation has become unstable and difficult due to the Russia-Ukraine war, which is also affecting Bangladesh. As long as these external vulnerabilities persist, Bangladesh will have to maintain such a tough decision," the finance minister noted.

The Prime Minister's Office (PMO) has already sought the ministries list with projects costing the government more than Tk50 crore each. The list would include other details including progress of the ongoing projects, amount of foreign funding and upcoming development works.

The government hoped the forex reserve would surpass the $50 billion mark by the end of FY22, but a different reality caused concerns to policymakers.

According to the International Monetary Fund (IMF), as some $7.2 billion of the current reserve will be spent for the Export Development Fund (EDF), the amount cannot be considered as a forex reserve.

According to the traditional IMF rule of thumb, reserve adequacy refers to the ability of affording import bills for next 3-6 months. Bangladesh has always been implementing a policy incorporating a foreign currency reserve that can pay for import bills for next 6 months. Finance ministry officials said it would not be possible to maintain the policy if imports cannot be capped.

Apart from the EDF use, the government last year set up the Bangladesh Infrastructure Investment Fund for development financing as the reserve kept burgeoning.

The World Bank warned Bangladesh in the second week of April this year as the country's reserve continued to deplete due to higher import costs than export earnings and low remittance inflow.

The global lender said the use of forex reserve for non-monetary purposes such as investment project financing under the Bangladesh Infrastructure Development Fund and the expansion of the Export Development Fund should be reconsidered.

The Washington-based lender also suggested Taka depreciation against the US Dollar.

Bangladesh depreciated Taka this month and raised the margin for Letter of Credit (LC) opening for importing luxury items as high as 75% in an effort to keep the reserve at a satisfactory level.

"We have to keep pace with the world situation," Finance Minister Mustafa Kamal said Wednesday, adding the government is doing everything to manage the unusual global situation triggered by the war.

"Taking tough decisions does not mean that the wheel of the country's economy will come to a halt, development projects will stop or there will be a negative impact on GDP," said the minister. "Rather it is kind of restructuring everything as the conflict continues without a sign of stopping."

Stating that Prime Minister Sheikh Hasina has instructed public officials not to allow unnecessary foreign trips, the finance minister said tours that are taking place now have been approved earlier. "There will not be any approval for official tours to foreign countries except the urgent ones. No more foreign tours for now."

An additional secretary of the finance ministry, speaking on condition of anonymity, told The Business Standard that they have been now restructuring a project list based on priority. The list was prepared during the pandemic.

According to finance ministry and planning ministry officials, there are 1,819 approved projects in the annual development programme with the estimated cost of Tk1,853,855 crore. Of this, Tk1,069,293 crore will be spent from the state coffer, while foreign aid will amount to Tk698,656 crore. The government's foreign exchange expenditure has been estimated at Tk84,304 crore.

This year's Tk212,988 crore development spending will cost the government Tk133,758 crore from its own pocket, while Tk69,604 crore will come from foreign sources. The government will spend Tk8,039 crore from its fund for foreign currencies.

Professor Mustafizur Rahman, distinguished fellow at leading think-tank Centre for Policy Dialogue (CPD), said the government measures to ease pressure on reserve are "logical", and there are "no alternatives" to tightening the belt for public expenditure now.

He suggested continuing projects that are either at the half of the implementation or nearing completion as an abrupt fund suspension now would cause cost escalation later.

Professor Mustafizur Rahman advocated for delaying projects that are yet to lodge any physical progress.

Selim Raihan, executive director at the South Asian Network on Economic Modeling (Sanem), also praised the government move.

"But I also want to ask the authorities as to why they took the projects without considering the merits properly. If the projects were taken as per the need, there would be no-priority or less-priority project categories," he noted.

Bangladesh / Top News

Forex / Dollar Reserve

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