Bangladesh's forex reserves strained due to dollar-price appreciation, costlier imports

Bangladesh's foreign-exchange reserves are under pressure from different dimensions, principally for unabated dollar-price appreciation and costlier imports, sources say.

Officials attribute the imbalances mainly to higher import-payment obligations particularly on account of fuel oil, fertilizer and capital machinery, as reports say the global market sees a bull run on supply shortages amid the economic reopening after production disruptions caused by pandemic-enforced lockdowns.

The reserve position dropped below US$45 billion Thursday, by official count, following the making of a routine payment to the Asian Clearing Union (ACU) against imports during September-October period of the current calendar year.

After the payments, the forex reserves stood at $44.87 billion on the day from $46.47 billion of the previous working day, according to the central bank's latest statistics.

Forex reserves have maintained a downturn in the last couple of months following lower flow of inward remittances and higher import costs, they explained.

The reserve level rose to $48.04 billion on August 24 last, setting a new record, from $46.58 billion of the previous working day after receiving $1.45 billion from the International Monetary Fund (IMF) as general allocation of Special Drawing Right (SDR).

The central bank has so far sold $1.58 billion from the reserves direct to the commercial banks as liquidity support for settling their import- payment obligations in the current fiscal year (FY 2021-22).

"We may continue providing such foreign-currency support to the banks in line with the market requirement," a top central banker told the FE in reply to a query.

Bangladesh's import-payment obligations have increased significantly in recent months for big purchases of textile products along with upward trend in fuel-oil prices on the global market.

Actually, the lower inflow of remittance and higher import bills have built up pressure on the country's forex reserves, leading to a steady devaluation of Bangladesh Taka (BDT) against the US dollar, according to experts.

The BB officials also said the forex reserves are under pressure to some extent because of higher import payments particularly for petroleum products, capital machinery and fertilizer.

The import of LNG (liquefied natural gas) is also adding to the forex-reserve pressure in the recent months, they added.

Meanwhile, the actual import in terms of settlement of letters of credit (LC) jumped by 47.18 per cent to $11.02 billion during the July-September of FY'22 from $9.90 billion in the same period of the previous fiscal.

However, the opening of LC, generally known as import order, rose more than 49 per cent to $ 19.90 billion during the period under review from $13.31 billion in the same period of FY'21.

On the other hand, the remittance inflow dropped nearly 20 per cent to $7.05 billion during the July-October period of the current fiscal year from $ 8.81 billion in the same period of the previous fiscal, the BB data show.

Earlier on Wednesday, the exchange rate of local currency depreciated by 5.0 poisha more on the inter-bank foreign-exchange market mainly due to higher demand for the greenback for settling import-payment obligations.

The US dollar was quoted at Tk 85.75 each on the day against BDT 85.70 of the previous working day.

The central bank of Bangladesh remitted $1.63 billion to the ACU headquarters in Tehran on Thursday in line with the existing provisions of the union.

The amount of ACU payment rose to $1.63 billion during the period under review from $1.56 billion earlier mainly due to higher imports from the ACU member-countries, particularly from India.

"We're importing different consumer items, cotton, raw materials and capital machinery from the ACU member-countries, particularly from India," another BB official said.

Under the existing provisions, outstanding import bills and interest thereof are to be paid at the end of every two months among the member-countries.

The ACU is an arrangement involving Bangladesh, Bhutan, India, Iran, Myanmar, Nepal, Pakistan, Sri Lanka and the Maldives, through which intraregional transactions among the participating central banks are settled on a multilateral basis.

The union started its operation in November 1975 to boost trade among the member-countries. Bangladesh and Myanmar joined the union as the sixth and seventh members in 1976 and 1977 respectively. Bhutan joined the ACU in December 1999 and the Maldives in January 2010.

Shah Md. Ahsan Habib, professor and director at Bangladesh Institute of Bank Management (BIBM), appeared skeptical about the money-market volatility as he urged the policymakers to monitor the overall imports closely to help minimize volatility on the country's forex market.

"We should discourage the import of unnecessary or luxury items to keep the forex market stable," Dr Habib said while replying to a query.

He also finds the central bank on right track in selling the foreign currency from the reserves to the banks for meeting import-payment obligations.

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