Foreign exchange reserves, investment and import

Prolonged political instability in the country has been adversely affecting the investment situation. New investment has almost come to a halt. In the absence of new investment, demand for capital machinery as well as overall import has gone down. Lesser import means lesser demand of foreign currency; and decreased demand of foreign currency enhanced the foreign exchange reserves. In December 19, 2013, the Bangladesh Bank announced that the foreign exchange reserves stood at Tk 18 billion, the highest ever.
There has hardly been any investment in the country for quite long resulting in the fall of import. Each month records smaller volume of import compared to previous year. Accordingly, many banks are facing problems with remittance inflow. Because of lesser demand in market, banks are selling foreign currency to the Bangladesh Bank. Bangladesh Bank purchased about $4.54 billion in 2012 and $1.49 billion during the first quarter of the current fiscal year. The process of purchasing dollar from the banks continues. This way the foreign exchange reserves of the Bangladesh Bank are fattening.
Many banks collect remittances from overseas on a competition basis. As the demand for dollar in the local market is low, banks come to the central bank. But Bangladesh Bank can not provide taka against dollar. In that case Bangladesh Bank provides bonds to the banks. That is why, reserve management cost is increasing.
It is clear that, banks are unable to hold all the foreign currency they actually earn. The central bank says if there exists more dollar than the maximum balance, banks must sell them in the market. If selling in the market is not possible, banks have to sell those dollars to the Bangladesh Bank. Because of investment instability, demand for dollar is too low and that is why banks have surplus volume of dollar. If dollar is purchased from Bangladesh Bank, money circulation is increased in the market. Considering this, in 2010, Bangladesh Bank increased the dollar holding rule to 15 per cent from 9.0 per cent for banks. In that situation, many banks hold more dollars than before. If this phenomenon goes on, banks will face serious problems. Considering this, the Bangladesh Bank is purchasing more dollars and consequently foreign exchange reserve is increasing at a rapid pace.
Reasons for increasing foreign exchange reserves are: first, import has decreased due to the decreasing demand for investment. Second, in recent years, commodity import has decreased as there was sufficient domestic production. Third, banks have become unable to utilise the remittances that they actually earn.
Nasima Khatun is a student of
the Department of Finance,
University of Dhaka.
neha.du09@gmail.com