Foreign currency reserve: its cost and management
Tuesday, 17 November 2009
Dr. Jamaluddin Ahmed FCA
Foreign currency liquidity management is an important issue for any country. Since a country's ability to provide foreign currency liquidity is limited to its reserves, the selling of other liquid foreign exchange assets, and its borrowing potential, a pure foreign currency liquidity problem may quickly turn into a massive payment problem or even problem of default. This implies that all parties which accept foreign currency liabilities should, depending on their asset structure, carefully consider the liquidity risk present, and that the authorities should monitor foreign currency liabilities and take appropriate action. Authorities are particularly vigilant where foreign currency liquidity risks are concentrated. In theory, exchange risk could apply to any currency mismatch, but in the present days most important concern is with the mismatch between foreign and domestic currencies. In particular, the mismatch between bank liabilities denominated in dollars and bank assets in local currencies and/or services from local currency earning is significant in the developing countries. The liquidity risk arises in the situation where liabilities are of shorter maturity than assets, so that liabilities are subject to a rollover or refinancing risk. Institutions with maturity mismatches may suffer runs and be forced to sell assets at substantially reduced prices in a situation of stress when liabilities coming due are not rolled over.
The management of international reserves remains one of the unstudied aspects of international monetary systems. There are now a number of reasons why this should be given importance: there is the rush by central banks of the industrialised countries to come out of gold; changes in trade relation, capital account restrictions and exchange rate regimes of developing countries may also have important repercussions for the composition and management of their reserves.
Rationale for holding of reserves: Countries differ in a very great number of ways in their decisions to hold foreign exchange reserves, depending on the size of population, government system, state of development, wealth, openness to international trade, mix of local and foreign currency borrowing. Despite this, nearly every country has a need of holding foreign currency reserves. The reasons for holding such reserves also differ widely.
However, the main reasons for holding reserves include a) formal backing for the domestic currency, b) a tool of exchange rate or monetary policy, c) to provide funds for servicing foreign currency liabilities, d) as a source of funds to pay for government expenditure overseas, e) provide defence against emergencies or disaster and f) as an investment fund, primarily for financial gain.
Whatever the rationale for holding of official reserves, and whoever owns them in the legal sense, there are three common features of official reserves management. First, the assets are public assets and are held on behalf of others to attract a higher fiduciary duty; and public assets attract highest concern for their safety. Secondly, the assets are there to be used which means that official reserves management must always be conducted in a manner ensuring their availability as and when required. Finally, it is now widely sensible and legitimate for the authorities to invest both time and effort in the reserves management operation to ensure that potential income is not wasted or foregone.
Size of reserves: The debate over the optimum size of reserves has two main elements. The first is the correct identification of the use of the reserves and therefore of the minimum required to meet the identified needs. No sensible discussion of the optimum size of the reserves can take place before this has been done. The second element is a correct analysis of the cost of funding the reserves. The debate over limiting the growth of the reserves is easier to conduct if the true cost of reserves accumulation is known. These two elements together provide a lower bound to the reserves, enough to meet the uses identified, and a pressure not to increase the reserves above that. It is not possible to identify the precise level that corresponds to the lower bound, as the process is not an exact science. And most countries wish to hold a "comfort margin" above the minimum requirement they identify. But it is important to realise that, except in rare cases, the authorities are unlikely to do the wise thing by accumulating reserves without limit.
Country practices: A crucial aspect of liquidity management is the level of international reserve. In the Asian crisis, the economies with largest reserves were able to hold their exchange rates steady (China and Hongkong) or suffered only relatively modest depreciation (Singapore and Taiwan), while most other emerging economies in the region suffered severe devaluations. A recent poll of reserve managers supports Fischer's (2000) supposition that "it is very likely that countries seeking to draw lessons of international financial crisis will decide to hold much larger reserves than before (Weller, 1999)." There are, of course, costs of holding reserves. Their assessment is complicated by the alternative opportunity costs used to calculate them. Building up and holding excessive reserve may also give rise to other types of costs, such as excessive monetary expansion, particularly, when underdeveloped financial markets limit the effectiveness of sterilization operations or policy mistakes that high reserves allow to be maintained for a long period.
In the days when the balance of payment was dominated by trade, holding the equivalent of three months' import was regarded as a useful rule of thumb. Some countries still to some extent apply such rules. The Czech practice is over 3 months, Chile's 5-6 months, Poland's 03 to 06 months, India's 12 months. An alternative rule of thumb for today's environment, when capital flows dwarf trade, was brought to public by Greenspan (1999). It is often called "Guidotti rule", as it was proposed by Guidotti (1999). The rule states that usable foreign currency reserves, including those available through contingent credit lines, should be sufficient to meet all repayments and interest on foreign debt falling due over the next year (Grenville 1999). This rule is some times expressed as being able to live without new foreign borrowing for up to one year. Critics argue that that this is not a helpful way of putting it as it implicitly assumes that there is a balanced current account and no other capital transactions.
In particular, it assumes no capital flight, and this is most likely to occur just when the adequacy of reserves is attracting most attention. Raddy (1997) combined both rules of thumb and expressed India's reserves in terms of "months of payment for imports and debt service taken together" but also noted that that other indicators such as short-term debt and portfolio flows were taken into account in assessing reserve adequacy. In India, the total stock of short-term debt and portfolio flows was less than 75% of the level of reserves.
Bangladesh is a country where the position of foreign currency reserve has become a popularity contest among the ruling parties. This is a priority agenda for the Finance Minister. For example, one month after the election of 2001 the then Finance Minister said that he keeps the foreign currency reserve position in his pocket every day. And after 10 months of the last general election, the Governor of Bangladesh Bank proudly declared recently that the country enjoyed now the highest-ever foreign exchange reserve position.
Cost of holding reserves: There is an obvious cost of holding reserves and assessment of such cost is complicated by the alternative opportunity costs used to calculate them. The opportunity costs of reserves accumulated from a succession of current account surpluses are the returns on forgone domestic investment. This approach is prevalent in the academic literature and is particularly salient in the Asian countries where the large reserve accumulation can be viewed as the counterpart of a much reduced rate of domestic investment. However, the marginal productivity of capital is hard to measure. For high-inflation countries, where drastic stabilisation policies based on fixed or nearly fixed exchange rate are implemented, the cost of reserve has proved to be very heavy. Yet the ultimate cost of holding reserve may be lower than this once allowance is made for future depreciation of the domestic currency. In case of foreign currency borrowing to build the reserves, the cost is the credit spread, negligible for borrowers at the upper end of investment grade, but high for developing and emerging economies. Both of these types of calculations might overstate the cost of reserve accumulation to the economy as a whole-- higher reserves may lead to improved sovereign credit ratings and so lower interest rate for many borrowers. Increasing foreign currency reserves by borrowings demonstrates that foreign counterparts are comfortable with extending credit. And, of course, the recent crises have demonstrated the cost of running out of reserves can be very high.
Building up and holding of excessive reserves may also give rise to other types of costs, such as excessive monetary expansion, in particular, when underdeveloped financial markets limit the effectiveness of sterilization operations or policy mistakes that reserves allow to be maintained for longer. It is sometimes argued that a country should not increase borrowing when there is build-up of foreign exchange reserves, since the return on reserve is less than the cost of debt. But one must be careful that the level of reserves satisfies the need for liquidity, offers insulation against unforeseen shocks and acts as a source of comfort to foreign investors.
The essence of reserve management being safety and liquidity, all the investments made thereof are of highest credit quality and excellent liquidity, and are usually short-term. Hence the return on reserves and the cost of borrowing are not strictly comparable, though they need to be considered relevant if a borrowing is meant merely to shore up the reserves. Reserves, by themselves, should not, therefore, influence the desirable level of external borrowing. In fact a comfortable level of reserve could help lower spreads on foreign currency borrowing, in that sense, they are complementary rather than substitutable. Besides, the size of reserves and the quality of reserves also assume importance. Unencumbered reserve assets must be available to the authorities at any point of time for fulfilling various objectives assigned to reserves.
Disclosure practices on foreign currency teserves: One of the primary responsibilities of national authorities is the maintainance of macroeconomic stability, including the management of foreign currency reserves. The transparency and accountability of national authorities require that that timely, comprehensive and accurate information about macroeconomic developments as well as the macroeconomic policies are made. The IMF has established standards for dissemination of macroeconomic statistics -- the Special Data Dissemination Standard (SDDS) for all member countries. The recent Asian crisis revealed the necessity of these standards and calls for strengthening these standards in the area of reserves, external debt management and indicators of financial sector soundness. Specifically, the recent crisis demonstrated that gross reserves can be a misleading indicator of the authorities' foreign currency liquidity position, i.e., of the foreign currency resources available to the authorities to meet a sudden increase in the demand for foreign exchange, and of the potential drain on those resources, such as short-term foreign currency liabilities and forward positions.
The external liabilities of the broader public sector and the private sector when exceeding those of the national authorities leads to facilitate assessment of a country's external position and exposure to foreign exchange liquidity risk. It is considered essential to supplement information about the national authorities' foreign currency liquidity position with data on the external position of other sectors. To this end, it is desirable to have all the IMF subscribers to the SDDS compile and disseminate their international investment position -- a detailed balance-sheet of the country's external assets and liabilities. The existence of disclosure standards such as national accounting standards and the SDDS helps to highlight the importance of transparency. However, improvements in transparency depend on the implementation and compliance with recognised standards. The benefits inherent in transparency provide the strongest incentive for compliance.
But this incentive can be strengthened through monitoring or independent assessments of a country's observance of recognised disclosure standards. Moreover, a monitoring mechanism is a crucial means of enhancing the credibility of a firm's or country's claim to be transparent or have moved from a low transparency regime to a higher one. Central bankers, like others active in international financial markets, are reluctant to reveal detailed information on their foreign currency trade and reserve position. They provide time series on total reserves although not always with speed and accuracy that one might like. These are problems that are supposed to be rectified by the requirements of the IMF's SDDS, but not even that requires them to divulge information on currency composition of reserves.
Disclosure practices of 13 IMF member countries have been examined and that have been compared with that of Bangladesh. In this table the item of disclosure foreign currency reserve items are documented.
Under broad headings, these items include Reserve Assets, Short-term drain on Reserves and Accounting Practices of the individual countries. Each broad heading has sub-items for disclosure under each main items. Frequency and timeliness of disclosures are expressed in terms of business day, weekly, monthly and annually.
There exists similarity among 13 countries in respect of disclosing total reserve and breakdown of gold, foreign exchange securities, deposits and of not disclosing the foreign exchange deposits with domestic banks and currency composition of foreign currency reserves. Excepting Thailand, USA, Malaysia, Brazil and Argentina, others disclose assets on loan in total but Canada on interval of 4/5 months and annually. None of the countries discloses assets pledged or collateralised. Foreign currency liabilities of the central bank with residual maturity of one year or less is reported by Brazil on monthly basis while Bundesbank in Germany includes this with Deutche mark liabilities and the UK on quarterly and 2 months interval while other 10 countries do not report it. Foreign currency liabilities of the central government with residual maturity of one year or less are not disclosed by Australia, Canada, France, Germany, Hong Kong, Japan Malaysia, and USA, while Argentina, Brazil, Thailand and the UK discloses it on different practices. Aggregate forward position is disclosed by Australia on a 15-day interval, Thailand on weakly basis, and the UK quarterly, while the other 10 countries do not make any disclosure. Excepting Thailand and the UK, other 11 countries do not disclose aggregate swap position. Excepting for Canada, none of the other 12 countries disclose the aggregate option position and all 13 countries do not disclose the foreign currency credit line to domestic banks. The accounting practice on the methods of valuation of reserves varies. For example, 06 countries, including the USA, record on market value, 03 countries, including the UK, Malaysia and Thailand, value on historic cost. Canada follows lower of market value and amortised cost and Germany lower of the market value and the cost and Japan does not disclose the method of valuation.
Argentina, Australia, Brazil, and Hong Kong do daily revaluations of foreign currency reserves. While Canada and the USA do it monthly, France 6 monthly, Germany quarterly, Malaysia fortnightly, and Thailand and the UK on an annual basis. Information on disclosure practice of this item is not available in case of Japan. There are some exceptions, for example, Argentina manages foreign currency reserves by employing external managers, Australia includes also and Hong Kong includes equities and interest rate swaps with reserves.
Bangladesh was used to be considered as foreign loan syndrome economy but in the recent years, the country with its growing foreign remittance and increased export reduced its foreign loan dependence significantly. Despite recession, Bangladesh is increasing its foreign currency reserve but one must remember this reserve obviously has a cost. To avoid this cost of foreign currency reserve the policy makers need to find economically viable alternatives.
The writer, a partner of Hoda Vasi Chowdhury, Chartered Accountants, an independent correspondent firm to Deloitte Touch Tohmatsu, is the treasurer of the Bangladesh Economic Association. He can be reached at: jamal@hodavasi.com
Foreign currency liquidity management is an important issue for any country. Since a country's ability to provide foreign currency liquidity is limited to its reserves, the selling of other liquid foreign exchange assets, and its borrowing potential, a pure foreign currency liquidity problem may quickly turn into a massive payment problem or even problem of default. This implies that all parties which accept foreign currency liabilities should, depending on their asset structure, carefully consider the liquidity risk present, and that the authorities should monitor foreign currency liabilities and take appropriate action. Authorities are particularly vigilant where foreign currency liquidity risks are concentrated. In theory, exchange risk could apply to any currency mismatch, but in the present days most important concern is with the mismatch between foreign and domestic currencies. In particular, the mismatch between bank liabilities denominated in dollars and bank assets in local currencies and/or services from local currency earning is significant in the developing countries. The liquidity risk arises in the situation where liabilities are of shorter maturity than assets, so that liabilities are subject to a rollover or refinancing risk. Institutions with maturity mismatches may suffer runs and be forced to sell assets at substantially reduced prices in a situation of stress when liabilities coming due are not rolled over.
The management of international reserves remains one of the unstudied aspects of international monetary systems. There are now a number of reasons why this should be given importance: there is the rush by central banks of the industrialised countries to come out of gold; changes in trade relation, capital account restrictions and exchange rate regimes of developing countries may also have important repercussions for the composition and management of their reserves.
Rationale for holding of reserves: Countries differ in a very great number of ways in their decisions to hold foreign exchange reserves, depending on the size of population, government system, state of development, wealth, openness to international trade, mix of local and foreign currency borrowing. Despite this, nearly every country has a need of holding foreign currency reserves. The reasons for holding such reserves also differ widely.
However, the main reasons for holding reserves include a) formal backing for the domestic currency, b) a tool of exchange rate or monetary policy, c) to provide funds for servicing foreign currency liabilities, d) as a source of funds to pay for government expenditure overseas, e) provide defence against emergencies or disaster and f) as an investment fund, primarily for financial gain.
Whatever the rationale for holding of official reserves, and whoever owns them in the legal sense, there are three common features of official reserves management. First, the assets are public assets and are held on behalf of others to attract a higher fiduciary duty; and public assets attract highest concern for their safety. Secondly, the assets are there to be used which means that official reserves management must always be conducted in a manner ensuring their availability as and when required. Finally, it is now widely sensible and legitimate for the authorities to invest both time and effort in the reserves management operation to ensure that potential income is not wasted or foregone.
Size of reserves: The debate over the optimum size of reserves has two main elements. The first is the correct identification of the use of the reserves and therefore of the minimum required to meet the identified needs. No sensible discussion of the optimum size of the reserves can take place before this has been done. The second element is a correct analysis of the cost of funding the reserves. The debate over limiting the growth of the reserves is easier to conduct if the true cost of reserves accumulation is known. These two elements together provide a lower bound to the reserves, enough to meet the uses identified, and a pressure not to increase the reserves above that. It is not possible to identify the precise level that corresponds to the lower bound, as the process is not an exact science. And most countries wish to hold a "comfort margin" above the minimum requirement they identify. But it is important to realise that, except in rare cases, the authorities are unlikely to do the wise thing by accumulating reserves without limit.
Country practices: A crucial aspect of liquidity management is the level of international reserve. In the Asian crisis, the economies with largest reserves were able to hold their exchange rates steady (China and Hongkong) or suffered only relatively modest depreciation (Singapore and Taiwan), while most other emerging economies in the region suffered severe devaluations. A recent poll of reserve managers supports Fischer's (2000) supposition that "it is very likely that countries seeking to draw lessons of international financial crisis will decide to hold much larger reserves than before (Weller, 1999)." There are, of course, costs of holding reserves. Their assessment is complicated by the alternative opportunity costs used to calculate them. Building up and holding excessive reserve may also give rise to other types of costs, such as excessive monetary expansion, particularly, when underdeveloped financial markets limit the effectiveness of sterilization operations or policy mistakes that high reserves allow to be maintained for a long period.
In the days when the balance of payment was dominated by trade, holding the equivalent of three months' import was regarded as a useful rule of thumb. Some countries still to some extent apply such rules. The Czech practice is over 3 months, Chile's 5-6 months, Poland's 03 to 06 months, India's 12 months. An alternative rule of thumb for today's environment, when capital flows dwarf trade, was brought to public by Greenspan (1999). It is often called "Guidotti rule", as it was proposed by Guidotti (1999). The rule states that usable foreign currency reserves, including those available through contingent credit lines, should be sufficient to meet all repayments and interest on foreign debt falling due over the next year (Grenville 1999). This rule is some times expressed as being able to live without new foreign borrowing for up to one year. Critics argue that that this is not a helpful way of putting it as it implicitly assumes that there is a balanced current account and no other capital transactions.
In particular, it assumes no capital flight, and this is most likely to occur just when the adequacy of reserves is attracting most attention. Raddy (1997) combined both rules of thumb and expressed India's reserves in terms of "months of payment for imports and debt service taken together" but also noted that that other indicators such as short-term debt and portfolio flows were taken into account in assessing reserve adequacy. In India, the total stock of short-term debt and portfolio flows was less than 75% of the level of reserves.
Bangladesh is a country where the position of foreign currency reserve has become a popularity contest among the ruling parties. This is a priority agenda for the Finance Minister. For example, one month after the election of 2001 the then Finance Minister said that he keeps the foreign currency reserve position in his pocket every day. And after 10 months of the last general election, the Governor of Bangladesh Bank proudly declared recently that the country enjoyed now the highest-ever foreign exchange reserve position.
Cost of holding reserves: There is an obvious cost of holding reserves and assessment of such cost is complicated by the alternative opportunity costs used to calculate them. The opportunity costs of reserves accumulated from a succession of current account surpluses are the returns on forgone domestic investment. This approach is prevalent in the academic literature and is particularly salient in the Asian countries where the large reserve accumulation can be viewed as the counterpart of a much reduced rate of domestic investment. However, the marginal productivity of capital is hard to measure. For high-inflation countries, where drastic stabilisation policies based on fixed or nearly fixed exchange rate are implemented, the cost of reserve has proved to be very heavy. Yet the ultimate cost of holding reserve may be lower than this once allowance is made for future depreciation of the domestic currency. In case of foreign currency borrowing to build the reserves, the cost is the credit spread, negligible for borrowers at the upper end of investment grade, but high for developing and emerging economies. Both of these types of calculations might overstate the cost of reserve accumulation to the economy as a whole-- higher reserves may lead to improved sovereign credit ratings and so lower interest rate for many borrowers. Increasing foreign currency reserves by borrowings demonstrates that foreign counterparts are comfortable with extending credit. And, of course, the recent crises have demonstrated the cost of running out of reserves can be very high.
Building up and holding of excessive reserves may also give rise to other types of costs, such as excessive monetary expansion, in particular, when underdeveloped financial markets limit the effectiveness of sterilization operations or policy mistakes that reserves allow to be maintained for longer. It is sometimes argued that a country should not increase borrowing when there is build-up of foreign exchange reserves, since the return on reserve is less than the cost of debt. But one must be careful that the level of reserves satisfies the need for liquidity, offers insulation against unforeseen shocks and acts as a source of comfort to foreign investors.
The essence of reserve management being safety and liquidity, all the investments made thereof are of highest credit quality and excellent liquidity, and are usually short-term. Hence the return on reserves and the cost of borrowing are not strictly comparable, though they need to be considered relevant if a borrowing is meant merely to shore up the reserves. Reserves, by themselves, should not, therefore, influence the desirable level of external borrowing. In fact a comfortable level of reserve could help lower spreads on foreign currency borrowing, in that sense, they are complementary rather than substitutable. Besides, the size of reserves and the quality of reserves also assume importance. Unencumbered reserve assets must be available to the authorities at any point of time for fulfilling various objectives assigned to reserves.
Disclosure practices on foreign currency teserves: One of the primary responsibilities of national authorities is the maintainance of macroeconomic stability, including the management of foreign currency reserves. The transparency and accountability of national authorities require that that timely, comprehensive and accurate information about macroeconomic developments as well as the macroeconomic policies are made. The IMF has established standards for dissemination of macroeconomic statistics -- the Special Data Dissemination Standard (SDDS) for all member countries. The recent Asian crisis revealed the necessity of these standards and calls for strengthening these standards in the area of reserves, external debt management and indicators of financial sector soundness. Specifically, the recent crisis demonstrated that gross reserves can be a misleading indicator of the authorities' foreign currency liquidity position, i.e., of the foreign currency resources available to the authorities to meet a sudden increase in the demand for foreign exchange, and of the potential drain on those resources, such as short-term foreign currency liabilities and forward positions.
The external liabilities of the broader public sector and the private sector when exceeding those of the national authorities leads to facilitate assessment of a country's external position and exposure to foreign exchange liquidity risk. It is considered essential to supplement information about the national authorities' foreign currency liquidity position with data on the external position of other sectors. To this end, it is desirable to have all the IMF subscribers to the SDDS compile and disseminate their international investment position -- a detailed balance-sheet of the country's external assets and liabilities. The existence of disclosure standards such as national accounting standards and the SDDS helps to highlight the importance of transparency. However, improvements in transparency depend on the implementation and compliance with recognised standards. The benefits inherent in transparency provide the strongest incentive for compliance.
But this incentive can be strengthened through monitoring or independent assessments of a country's observance of recognised disclosure standards. Moreover, a monitoring mechanism is a crucial means of enhancing the credibility of a firm's or country's claim to be transparent or have moved from a low transparency regime to a higher one. Central bankers, like others active in international financial markets, are reluctant to reveal detailed information on their foreign currency trade and reserve position. They provide time series on total reserves although not always with speed and accuracy that one might like. These are problems that are supposed to be rectified by the requirements of the IMF's SDDS, but not even that requires them to divulge information on currency composition of reserves.
Disclosure practices of 13 IMF member countries have been examined and that have been compared with that of Bangladesh. In this table the item of disclosure foreign currency reserve items are documented.
Under broad headings, these items include Reserve Assets, Short-term drain on Reserves and Accounting Practices of the individual countries. Each broad heading has sub-items for disclosure under each main items. Frequency and timeliness of disclosures are expressed in terms of business day, weekly, monthly and annually.
There exists similarity among 13 countries in respect of disclosing total reserve and breakdown of gold, foreign exchange securities, deposits and of not disclosing the foreign exchange deposits with domestic banks and currency composition of foreign currency reserves. Excepting Thailand, USA, Malaysia, Brazil and Argentina, others disclose assets on loan in total but Canada on interval of 4/5 months and annually. None of the countries discloses assets pledged or collateralised. Foreign currency liabilities of the central bank with residual maturity of one year or less is reported by Brazil on monthly basis while Bundesbank in Germany includes this with Deutche mark liabilities and the UK on quarterly and 2 months interval while other 10 countries do not report it. Foreign currency liabilities of the central government with residual maturity of one year or less are not disclosed by Australia, Canada, France, Germany, Hong Kong, Japan Malaysia, and USA, while Argentina, Brazil, Thailand and the UK discloses it on different practices. Aggregate forward position is disclosed by Australia on a 15-day interval, Thailand on weakly basis, and the UK quarterly, while the other 10 countries do not make any disclosure. Excepting Thailand and the UK, other 11 countries do not disclose aggregate swap position. Excepting for Canada, none of the other 12 countries disclose the aggregate option position and all 13 countries do not disclose the foreign currency credit line to domestic banks. The accounting practice on the methods of valuation of reserves varies. For example, 06 countries, including the USA, record on market value, 03 countries, including the UK, Malaysia and Thailand, value on historic cost. Canada follows lower of market value and amortised cost and Germany lower of the market value and the cost and Japan does not disclose the method of valuation.
Argentina, Australia, Brazil, and Hong Kong do daily revaluations of foreign currency reserves. While Canada and the USA do it monthly, France 6 monthly, Germany quarterly, Malaysia fortnightly, and Thailand and the UK on an annual basis. Information on disclosure practice of this item is not available in case of Japan. There are some exceptions, for example, Argentina manages foreign currency reserves by employing external managers, Australia includes also and Hong Kong includes equities and interest rate swaps with reserves.
Bangladesh was used to be considered as foreign loan syndrome economy but in the recent years, the country with its growing foreign remittance and increased export reduced its foreign loan dependence significantly. Despite recession, Bangladesh is increasing its foreign currency reserve but one must remember this reserve obviously has a cost. To avoid this cost of foreign currency reserve the policy makers need to find economically viable alternatives.
The writer, a partner of Hoda Vasi Chowdhury, Chartered Accountants, an independent correspondent firm to Deloitte Touch Tohmatsu, is the treasurer of the Bangladesh Economic Association. He can be reached at: jamal@hodavasi.com