On depletion of forex reserve

Asjadul Kibria | Published: December 23, 2023 18:49:55

The country's foreign exchange reserve has become a matter of grave concern for the last two years due to its rapid depletion. The rise in the cost of imports, coupled with a lower inflow of foreign earnings as well as growing pressure to repay external debt, pushed the prices of foreign exchanges and ultimately started to exhaust the foreign currency reserve. The gross outstanding amount of foreign exchange reserves was $46.39 billion at the end of the fiscal year 2020-21 (FY21), which came down to $41.82 billion at the end of FY22. It further declined to $31.20 billion at the end of FY23. At the end of the fifth month (or November) of the current fiscal year (FY24), it dropped to $24.90 billion. However, these figures are somewhat deceptive and do not explain the situation adequately. The net amount of foreign exchange reserves provides a more accurate picture.
To inflate the figure of foreign exchange reserve, Bangladesh Bank so far avoided the International Monetary Fund (IMF)-guided calculation method. The method, designed in the IMF's sixth version of the Balance of Payments and International Investment Position Manual (BPM6), is followed by most countries and is recognised as the international standard for calculating the foreign exchange reserve.
The intervention from the IMF finally compelled the central bank to calculate the foreign exchange reserve position following the BPM6, besides the gross estimate. The international financial institution imposed reform conditions as the country sought IMF assistance to support the BoP. Calculating the forex reserve as per BPM6 and releasing the figure is one of the conditions. The central bank also agreed to follow the BPM6 besides its practice of gross reserve calculation. There was, however, some reluctance to release the data as it would unveil the discrepancies between inflated and actual reserve. Finally, the central bank has started to release the data of net forex reserve from June last. It showed that net reserve stood at $24.75 billion at the end of last fiscal year, which reached $19.30 billion at the end of November last. Thus, the reserve calculated following the BPM6 is lower by around $6 billion on average than the gross reserve.
The BPM6 was introduced in 2009. Bangladesh Bank also claimed that it had followed the guidelines for calculating the country's overall Balance of Payments (BoP) since 2013. It was made clear by he central bank's latest annual statistical report regarding BoP, titled 'Bangladesh Balance Of Payments: 2022-23'. It also mentioned: "Data on international reserves comprise of monetary gold, SDR, reserve position in the Fund and foreign exchange which are collected from the internal records of the Bangladesh Bank and IMF. Transactions of gold, SDR and foreign exchange of Bangladesh Bank, transactions in the reserve position in the IMF are reflected in the reserve assets."
Thus, international reserves (or reserve assets in the balance of payments) are those external assets readily available to and controlled by a country's monetary authorities. According to IMF, international reserves usually comprise foreign currencies, other assets denominated in foreign currencies, gold reserves, special drawing rights (SDRs) and IMF reserve positions. These reserves may be used to finance international payment imbalances, directly or indirectly regulate the magnitude of such imbalances via intervention in foreign exchange markets to affect the exchange rate of the country's currency. A narrower definition for international reserves only includes foreign currency deposits and bonds. These assets held by the country's monetary authorities are usually denominated in different reserve currencies. Currently, around 60 per cent of the global foreign exchange reserve is US Dollar, followed by Euro (20 per cent), Japanese yen (5.40 per cent), British pound (4.80 per cent), and Chinese renminbi (2.45 per cent).
To be precise, foreign exchange reserve is a component of the BoP, a memorandum item. If the central bank started to follow the BPM6 in FY13, how could it have skipped the IMF-designed method of calculating the forex reserve? Statistics available with Bangladesh Bank showed that the outstanding amount of foreign exchange reserve jumped by around 48 per cent to $15.31 billion in FY13 from $10.36 billion in FY12. It was the biggest jump in forex reserve during the last one and a half decades.
In other words, when there is a manipulation in calculating the reserve to inflate its figure artificially, it has put the authenticity of the overall BoP under question. By ignoring the latest method on forex reserve calculation, the central bank generated the reserve's misguiding figure. That's why the government remained indifferent when the reserve started to deplete, claiming that there was nothing to worry although the reality is different.
In its latest assessment of Bangladesh's economy, the IMF said: "Bangladesh continues to face challenges amidst persistent external pressures. Continued global monetary tightening and elevated global commodity prices, coupled with existing vulnerabilities, have kept the Taka and FX reserves under pressure and increased the cost of living." [ IMF Country Report No. 23/409]. The report was published in the second week of this month, immediately before the release of $689 million in the second tranche of the $4.7 billion loan package of the fund allocated for Bangladesh. The loan is helpful to ease some pressure on the exchange rate as well as the forex reserve.
So far, policymakers have used some import-restrictive measures to ease the pressure on foreign exchange reserves, which also paid off to some extent. For instance, overall import payments were reduced by around 20 per cent in the first four months of the current fiscal year. As earnings from exports increased by 3.61 per cent in the same period, the merchandise trade deficit with the rest of the world decreased to $3.80 billion in July-October of the current year from $9.62 billion in the same period of last year.
Nevertheless, curbing imports is a temporary step to offset the depletion of international reserves. The country has no alternative but to gradually enhance the foreign exchange reserve to back up future international repayment obligations. Obviously, it will take some time as there is no quick fix.
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