Foreign currency reserve in economic resilience

Bangladesh began its economic motion with ZERO Foreign Currency Reserve. Once described as a "bottomless basket" with no hope of survival. Bangladesh has made significant strikes in its socio economic development by tremendous success in several sectors in its 5 decades history, emerging as a middle income economy.  It is now welcomed as a development model and serves as a beacon of progress for the world resulting from huge Foreign Direct Investment, several governments initiative make it possible for remarkable export earnings, robust foreign inward remittance flow, all of these elevated Foreign Currency Reserve US$ 48.06 billion in the year 2021.

 Unfortunately, catastrophe of the economy in advancement started at the time of  Russia-Ukraine war, due to this supply chain collapsed adversely, prices of essentials such as wheat, oil etc. increased substantially so as to payments increased abnormally, all of these affected exchange rate fluctuation & devaluation of Foreign Currency Reserve. Bangladesh Bank had to sell almost US$ 13.58 billion in last financial year to meet urgent obligations of the economy in stain situation. At that time government had to impose some restrictions such as increasing LC margin on luxurious goods, broaden tariff  base on imported goods, encouraged foreign remittances by swelling incentives & export earnings to boast up Foreign Currency Reserve while enhancing monitoring and price verification of all imports. Mentionable that export earnings amounting USD$ 55.558 billion in last year 2022-23, whereas it has already achieved US$ 43.55 billion in first 9 months against target of US$ 62.00 billion in current FY. Further BB Strengthened oversight of foreign exchange dealings by banks and money changers, reducing cash foreign currency holdings by the later, increasing interest rate on EDF loans, allowing interest income in RFCD accounts. Moreover, embattled foreign reserves of Bangladesh is finally got International Monetary Fund approval of loan amounting  US$ 4.7 billion for the country to help preserve macroeconomic stability, protect the vulnerable, and foster inclusive and green growth. Out of which 2 instalments already received, another 1 instalment is going to receive soon.

 It is good news to curb import for short term that saves foreign currency but not suitable in long term as industrial raw material & capital machinery less imported which creates unproductive market in future, because, out of 21 billon dollar import reduction, 12 billion dollar is industrial raw material & capital machinery which ultimately shrink GDP growth rate to below 6% in current fiscal year 2023-24. Market syndication may strong due to having less import of necessary goods. 
To lighten exchange rate instability and allow more flexibility, BB already introduced Crawling-Peg system as an interim measure before transitioning towards free-floating exchange rate regime. Under Crawling-Peg, exchange rate depreciate at a rate roughly equal to the inflation differentials between the country and it trading partners. It is worth to say that, in 1990, 68% developed and fastest growing developing economies recognized crawling peg. Later, in 2001, it has reduced to 16% & adopted market based floating rate. But, before going to free floating exchange rate instead of existing one, market structure should be developed.
 
The country has been heading for an economic situation that Sri Lanka experienced political upheaval trigged by an abrupt financial meltdown in the South Asian Island nation. they borrowed money in anyway without considering future consequence for raising their foreign reserves which ultimate shaped debt burden, lastly stroked on insolvency, however, they come back again. Calamity start in an emerging economy when it is incompetent to attain internal revenue goal, after a series of consequences, it finally knockout in the foreign currency reserve, 80s India & post Covid-19, Pakistan & Sri Lankas histories are the same. This failure is not for tax collection, it is for favoring rich people, no judgment for corruption, inequality in distribution of income. So, we should focus on the internal revenue generation instead of borrowing from local and international sources as our foreign debt already crossed US$ 100 billion, debt repayment may impact on the reserve position since interest on loans increased. Repayment of debt with interest has come to a astonishing amount more than US$ 2.57 billion in the first nine months of current fiscal year in which interest US$ 1.05 billion whereas it was US$ 1.73 billion in previous year, increased by US$ 84.00 million in that interest are largely responsible, global loan repayments have increased as several major projects have started repayments, for example, loan repayments of metro rail, Rooppur nuclear power plant. Furthermore, several Chinese Loans have to be paid installments. So upcoming years is very crucial, debt repayment would ultimately create pressure on the Reserve. Factors such as increasing productivity and supply of foreign exchange should be considered in taking up new foreign borrowing projects, the additional pressure shall not be created on the reserves. The government should also focus on urgent necessity projects, as we know that government is looking for approval of US$ 700.00 million (in which a portion is grant) from World Bank for Rohingaya community, there is a controversy on taking this project.

 Present dollar crisis & devaluation of Foreign Currency Reserve can be mitigated by securing committed grants/ loans of developments partners. Different donor organizations & countries commitment for US$ 46.55 billion remain idle {Tk.5,12,000.00 crore (approx.)}. It is assumed that owing to absence of capability, foreign money could not be utilized properly. Again, due to bureaucratic problems from developments partners money could not be released. Bangladesh got huge amount of monetary commitment for several Annual Development Programs in different time, but, whole amount has not been discharged. ADP amount is Tk.2,45,000.00 crore in current FY 2023-24, whereas on April 17, 2024, Foreign Currency reserve US$ 25.30 billion, as per BPM6 US$ 19.89 billion, net reserve US$ around 16.00 billion, according to IMF almost US$ 4.50 billion  deficit. Idle money with development partners/ organizations is US$ 46.55 billion which is more than double of ADP.  A special attention to be given for expulsion of such fund so that Bangladesh could benefit for couple of years. In spite of having commitment for money in diverse projects, money could not release due to number of reasons. For this, pipeline is getting so long as time is expanded. Besides, care also to given to repatriate outstanding export bills.

 An economy like us need to retain at least 3-4 months importation capacity fund which is amounting to US$ 15-20 billion, so Bangladesh need to adopt a strategy for keeping sufficient Reserve to meet financial obligations in the upcoming years, otherwise economic instability will adversely affect sustainable progress by reducing GDP growth rate below 6% whereas it had to plan for 8-9% GDP growth rate.

The writer is Banker Analyst, NCC Bank PLC, Head Office