Judicious use of foreign exchange reserve

The rise of foreign exchange reserve to a record level of $18 billion has spawned some questions on its likely impacts on the economy. I have come across an article written by Ahsan H Mansur, Executive Director of the Policy Research Institute in the FE on December 30. The article is very well-written but what attracted me most was its caption entitled 'Record foreign exchange reserves: A boon or bane?'
It looks we have a problem in hand but, regardless of whether you call it a boon or bane, it's a great relief from the depressing words like 'adverse balance of payments', 'critical foreign exchange shortage' that we heard all these years. The words that we genuinely hate to hear are those destructive ones starting with 'a'-- arms, ammunition, arson, anarchy, arrogance and annihilation of minority groups and political opponents.
It comes as no small wonder that in spite of these 'a' train, the key economic indicators - exports, imports and foreign exchange reserve - continue to maintain an upward thrust. It reinforces our belief that if there had not been vicious internecine squabbles, religious extremism and endemic corruption, Bangladesh could have easily shone as the brightest star in Asia.      
Some analysts have expressed concern that the rising reserve may create inflation in the economy due to infusion of high-powered money by the central bank. The concern is not unfounded but there is no room for complacence. We can draw a lesson from China which has seen its foreign exchange reserve rising to Himalayan height of $3,627 billion, miles ahead of second place Japan's $1,267 billion and the entire eurozone occupying the third spot with $763 billion. Still China's appetite to build up its stock of foreign assets is not abated. It maintains its currency, renminbi (yuan) substantially undervalued (currently $1=Yuan 6.1) to promote exports and discourage imports.  
Worried by the avalanche of cheap-priced Chinese goods entering their markets, many advanced countries in Europe and America are pressing China for realignment of the exchange rate of its currency at a realistic level but it has so far done only a symbolic adjustment. The remninbi is thought to be undervalued by as high as 50 per cent. Our big neighbour India has also accumulated a reserve of $295 billion but consciously avoided using it to support its falling rupee, a kind of benign neglect that we saw in the seventies when the US simply sat back while the greenback maintained a free fall in the days after it was de-linked from gold and Bretton Woods' par value system.
If anything, accumulation of reserve by Bangladesh cannot be attributed to the intrinsic strength of taka. Its strength has been sapped by prolonged higher than normal inflationary trend in the economy. Due to rising costs of production, especially after the recent wage hike in the apparel sector, the exporters are feeling the crunch while the imports are poised to accelerate once the dusts spewed by political activists settle down. The depreciation of the currency of India, our major trade partner through formal and equally important informal channels, also threatens to widen the trade gaps between the two countries.
It no doubt fuels our pride to maintain an overvalued taka but, as we have learned through ages, it spells disaster in the long run. Without waiting for the inevitable to happen, it will be wise to depreciate taka to neutralise the inflationary effect, to promote exports and remittances and to rein in the anticipated surge of imports.  
Now that we have a comfortable reserve it is also the opportune time to revisit some of the archaic restrictive measures taken during the period of scarcity. One is the requirement for import of inputs by the apparel industry on credit terms under the so-called back-to-back letters of credit. This compulsion to import the inputs on credit terms with all its concomitant costs and hassles is no longer necessary. The restriction may be relaxed to let the RMG units import the inputs on cash or sight basis as well. Import on cash basis will allow them to shop around to import their requirements from the cheapest and best sources. The existing requirement ties them to only a limited number of overseas suppliers who are willing to sell on supplier's credit or deferred payment terms.
Secondly, it will open new outlets for the banks to employ their idle money. In view of the limited opportunity for investment, the banks are often seen to be investing money in consumer loans and other unproductive and risky business.
Finally, and most significantly, the costs, including hidden costs of imports on credit terms, are quite high. A seemingly endless array of costs is involved on account of imports on credit terms. Studies made in eighties and nineties showed that import on credit terms, directly or indirectly, imposes an additional cost of anything from 3.0 to 4.0 per cent on the garment units. To avoid these costs the World Bank had given a loan in 1988 to create an Export Development Fund (The writer was a member of the two-man delegation to Washington). The Bangladesh Bank may infuse additional amount to this fund and remove the hassles that impede their use.
If these two steps are taken Bangladesh can save at least $300 to 400 million per year. On the other hand, investment of foreign exchange reserve in the international money market earns next to nothing. There are also other areas that are crying for reforms but everybody seems to be busy otherwise - to use another train, this time of 'p's -promotion, posting, perks and publicity.
We have always a fear that a healthy foreign exchange reserve might induce frenzy for its misuse on frivolous pursuits. It must be realised that foreign exchange earnings of the country are mainly the outcome of hard work of the ordinary people comprising a legion of peasants, our expatriate labour abroad and industrial workers. On the other hand, under the pro-rich policies of the post-'75 governments, the number of millionaires is doubling every five years but 40 million poor still go to bed with empty or half empty stomach.
The present government, which inherited a noble legacy from Bangabandhu to serve the ordinary men and women, should not fritter away the hard-earned foreign exchange for maintaining high-profile missions in obscure countries, foreign trips of the foreign minister every other day, carrying a plane-load of entourage for joy ride and import of super luxury goods. They should reset their priority to serve the men and women who sacrificed their lives and honour to create a homeland free from exploitation of many by a few.
The writer is a former                        central banker. [email protected]