Bangladesh Bank (BB) has informed that foreign exchange reserves have gone down to 29.96 billion dollars. Earlier on 8 May 2023 foreign exchange reserves dropped to 29.7 billion dollars. 1.1 billion dollars were paid to Asian Clearing Union (ACU) as import bills for the months of March and April 2023. This is the main reason behind the downtrend of foreign exchange reserves.
Importing luxurious items was curtailed to ease pressure on foreign exchange reserves in Bangladesh last year. However, foreign currencies reserves dwindled in 2022. Opening letters of credit (LCs) was reduced to lessen effect on reserves. Keeping in view the calculation of International Monetary Fund (IMF), foreign exchange reserves in Bangladesh will go down to 24 billion dollars at the beginning of 2023 after paying ACU bills.
Various measures have been taken to reduce the import pressure, with central bank leaving the responsibility to fix the exchange rate on the banks.
According to the Bangladesh Bank Order 1972, Bangladesh Bank exercises the authority on the type and management of foreign currency. Reserve functions as the protection to the settlement of import payment. Usually, a country should have the reserve enough to pay the import liability for three months as per the international standard.
Speaking to journalists, private research organization South Asian Network on Economic Modeling (SANEM) Selim Raihan said it is alarming that how the reserve is declining. Earnings from export and remittance will increase, but there is a fear over what the state of export will be in Bangladesh because of economic slowdown in Europe.
The government has taken many steps to control import in a bid to tackle the situation and may reduce growth. At present, macroeconomic stability must be emphasized more than GDP growth and the government must take further measures considering the overall situations, he added.
Dollar crisis is contributing to decline in reserve. Prices of fuel oil and food products increase following the Russia-Ukraine War. As a result, additional $2 billion from export earnings and remittance are spent for import in April, thus, beginning dollar crisis. Central bank controlled the dollar price, triggering the crisis. Besides, the government also started selling dollar from reserves to meet import liability of fuel oil and foods.
Amid this situation, Bangladesh Bank starts raising dollar price depreciating value of taka. Opening of LC (letter of credit) was halted to discourage import of several products while 100 per cent margin was given in some products to encourage import. The National Board of Revenue (NBR) also imposes additional duty on import of several products. Still dollar crisis is yet to go away.
Speaking to reporters, former Managing Director of Bank Asia Arfan Ali said, "Reserves that had increased during coronavirus outbreak are being spent now. It is adequate to have import cost for three months in reserve. However, it is better not to build any infrastructure and make any investment that spends dollars for now."
Bangladesh Bank has started selling dollar since April to tackle the currency crisis. However, the central bank did not sell dollars as much as there was the deficit. So, banks start receiving remittance at higher price, resulting in dollar price hike. The exchange rate of the US dollar was at Tk 85 in April. Now, banks are providing maximum Tk 107.50 a dollar for remittance.
Banks have been given the responsibility to fix the exchange rate since 12 September in a bid to check the soaring dollar price.
Association of Bankers, Bangladesh (ABB) and Bangladesh Foreign Exchange Dealers' Association (BAFEDA) set the exchange rate at Tk 99 and Tk 107.50 a dollar for exporters and remitters respectively. Banks have set the rate by Tk 1 more than the average of these two exchange rates for import cost.As a result, rise in dollar price stops for now, with import decreasing as well as export earnings and remittance increasing.
Speaking to journalists, BAFEDA Chairman and Sonali Bank Managing Director Afzal Karim said dollar supply has increased and demand also decreased. As a result, price is dropping. In between, price was raised artificially; fear that persisted over dollar price has gone away and crisis will also be eased slowly, he added.
There is a growing pressure on the foreign currency reserve of Bangladesh Bank because of selling dollar from reserve, which dropped to $36.40 billon now from $46 billion in February since about $10 billion have been sold from the reserve over the past seven months.
Bangladesh Bank still sells dollars from reserve at an exchange rate of Tk 96 though the inter-bank exchange rate, as mentioned on the central bank's website, is Tk 101-103 a dollar. Likewise, reserve surpasses $36 billion, but the actual useable amount is $29 billion. So, there is confusion over both amount of reserves and price of dollars.
On the other hand, India can meet 15 months of its import liability with its reserve, Switzerland 39 months, Japan 22 months, Russia 20 months and China can meet 16 months of its import liability.
Besides the reserves, Bangladesh Bank has also invested dollars in various bonds, currencies and gold at foreign countries. The central bank has also created a fund with money from the reserve in the country and that include an export development fund of $7 billion, a long term fund (LTF) and a green transformation fund (GTF).
Funds from the reserves were also provided to Biman Bangladesh Airlines and Sonali Bank to purchase airplanes as well as to Rabnabad channel dredging project of Payra port. Some $8 billion altogether have been used on these purposes.