The Bangladesh Bank has injected $330 million into the country’s foreign exchange market since February 1 when the International Monetary Fund disbursed $476.27 million to Bangladesh as the first installment of a $4.7 billion loan.
The Washington-based lender approved the loan in January under the extended credit facility (ECF) and the extended fund facility (EFF) to help the country defuse the ongoing volatility in its foreign exchange market.
Although the IMF has suggested Bangladesh reduce the frequent injection of US dollars into the market, the central bank has not followed the recommendation yet, said Ahsan H Mansur, executive director of the Policy Research Institute.
Between July 1 and February 9, the central bank supplied a record $9.44 billion to the market, according to data from the BB.
After the disbursement of the first tranche of the loan, the reserves stood at $32.69 billion on February 2, but the volume fell to around $32.6 billion yesterday owing to the continuous dollar injection into the market.
The reserve was $45.39 billion on February 9 last year.
The IMF support came as Bangladesh continues to face an exchange rate instability fuelled by a US dollar shortage caused by the fast depletion of the reserves amid escalated import payments against lower-than-expected export and remittance receipts.
According to an IMF document, rebuilding foreign exchange reserves remain a critical priority for Bangladesh in the short term.
Greater exchange rate flexibility, including attracting remittance inflows through formal channels, and scaling back non-monetary use of foreign exchange reserves, are expected to stabilise the reserves in the context of the ECF and the EFF programme, the IMF said.
“Foreign exchange interventions, which increased since the start of Russia’s war in Ukraine, should be limited to addressing disorderly market conditions.”
The government will have to start following IMF conditions from March this year.
As per the global lender’s quantitative performance criteria, foreign exchange reserves can’t be below $24.5 billion in June, $25.3 billion in September, and $26.8 billion in December.
Mansur explained that around $7 billion would have to be added to the reserves calculated by the IMF as the central bank considers the Export Development Fund and the funds under some other schemes while calculating its reserves.
This means the central bank will have to keep a reserve of at least $32 billion in June.
“So, the central bank should cautiously supply foreign currencies to the market. If the reserves slip below the level, the IMF may discontinue its programme and postpone its next disbursement,” Mansur said.
The IMF will disburse $4.7 billion in several installments over a 42-month period.
If the export earnings and remittance don’t increase to the expected level, the government will have to take more austerity measures, said Mansur, also a former high official of the IMF.
Although still in the positive territory, the current trends of export and remittance earnings, the two biggest sources of US dollars for the country, don’t promise that the receipts would go up in a massive way this year as the global economy continues to face challenges posed by the war-related disruptions.
Between July and January, exports grew 9.81 per cent year-on-year to $32.44 billion, according to data from the Export Promotion Bureau.
Expatriate Bangladeshis sent remittances amounting to $12.45 billion, in the first seven months of the current financial year, up 4.25 per cent from a year earlier.
Mansur says that the financial account of the balance of payments is now in the negative zone, so the central bank should take more policy measures, including the withdrawal of the ceiling of a 9 per cent interest rate on loans.
The deficit in the financial account stood at $1.09 billion in the first six months of 2022-23 in contrast to $6.89 billion during the same period a year ago, BB data showed.
Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, thinks that it will not be possible to stop the erosion of reserves by only using the IMF’s funds given the volume of the debt servicing and import payments.
Imports fell 2.15 per cent year-on-year to $38.13 billion in July-December.
“Both the government and the central bank should start the reform programmes in the financial sector that have been suggested by the IMF and local economists,” Rahman said.
Local economists and analysts have recommended the government take more measures to tackle the hundi cartel, an illegal cross-border financial transaction, to increase the remittance inflow.
Their calls came as the flow of remittance is still lower than expected given that a record number of Bangladeshis went abroad in 2022 in search of jobs. More than 11.35 lakh Bangladeshis left the country for jobs abroad last year.
“On top of that, the central bank should ask businesses to repatriate export proceeds as early as possible,” Prof Rahman said.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, says that although the deficit in the current account has narrowed in recent times, the majority of banks is still facing a shortage of dollars.
“Some banks are unable to open letters of credit as per the requirement of clients.”
February 11th, 2023
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