Bangladesh forex reserve gives red signal

by Special Correspondent
October 10, 2011

http://www.weeklyblitz.net/1879/bangladesh-forex-reserve-gives-red-signal

For the first time since independence of Bangladesh, country's foreign exchange reserve has dropped down below US$ 10 billion. Under such situation, it will be difficult for the country to meet next 3 month's import costs. The situation will further worsen if World Bank [WB] and International Monetary Fund [IMF] will decline to provide any loan to Bangladesh. Following such situation, exchange rate of US dollar is increasing in the local market. In line with international standard, every country willing to import has to have foreign exchanges to pay costs of next three months' import. Bangladesh's forex reserves crossed US$10 billion in September 2008 when military controlled interim government was in power. The forex reserve crossed US$11-billion mark four times in the past three years as export earnings and flow of remittance saw an increase. It slipped below US$11 billion in August when the central bank paid $838 million to the Asian Clearing Union [ACU], the intra-regional forum for settlement of monetary transactions. In March, the reserves hit US$11.32 billion, the highest in the country's history. Average foreign currency reserves were US$10.75 billion in 2009-'10 fiscal and US$10.91 billion in the last fiscal. On the other hand, the flow of remittance is also witnessing a negative trend.

After rising around 15 percent in July and August, it has been on a slope again in September. Expatriates remitted US$1.03 billion in July 2011 and US$1.08 billion in August. But in the first 23 days of September, they sent US$0.63 billion, leading to fear that it would not cross US$1-billion mark in the whole month.

Growth in remittance was 6.03 percent in the last fiscal, 13.4 percent in 2009-'10 and 22.42 percent in the 2008-'09 financial year. The import cost in the first two months of the current fiscal year was 35.72 percent higher than that in the same period of the last fiscal. The rate of opening Letters of Credit for petroleum oil import increased 91.8 percent in July-August period.

Declining remittances and falling foreign exchange reserves coupled with increasing government borrowing have put country's macro-economic stability under severe strains. The country's overall BoP is in deficit, for the first time in a decade, leading to losses in foreign exchange reserves, notwithstanding positive valuation efforts in the fiscal year [FY 2011]. The International Monetary Fund recently observed that double-digit inflation in Bangladesh would hurt the poor and erode their purchasing power, and affect the external competitiveness of the country's economy. It said non-food inflation is a real concern as it has also moved upward, given second-round of effects, and the outcome of, pro-cyclical policies. The Bangladeshi taka has come under pressure, with a moderate depreciation vis-à-vis the US dollar, allowed to facilitate external adjustment.

High government borrowing also poses a serious threat to the overall situation, as in the first two months of the current fiscal, it borrowed over Tk. 75 billion, while for the entire year the government had targeted to borrow only Tk. 185 billion from the domestic sector.

The gap between actual flow of remittance and the government's target, articulated in the Medium-Term Macroeconomic Framework [MTMF], is on the rise and might grow sharply in the upcoming years.

The percentage of labour migration has dropped in recent years, due to the recent economic recession, Middle East political unrest, and depressed demand in overseas labour markets. Data from the Bureau of Manpower Employment and Training [BMET] reveals that manpower exports, over the years, have been showing diminishing growth. Workers' remittances, a driver of growth for the economy of Bangladesh, has become a cause of concern, particularly against the backdrop of dwindling current account balance and volatility of exchange rates, having serious implications for macroeconomic stability and prospects of growth.

In fiscal year 2010-11, average exchange rate of the Taka [BDT], against the USD, was 70.48, over that of 69.19 in FY2009-10. The percentage change of depreciation of BDT against USD was 1.63. Considering a basket of eight currencies, the real exchange rate has depreciated from 97.78, in FY 2009-10, to 94.18 in FY 2010-11. Many believed that owing to spikes in prices of food products, fuel oil, imported machinery for new electricity plants, the demand for foreign currency has increased. As a result, the value of the taka has tumbled against the US dollar. The growth of credit should have been more disciplined and the subsidies for power and agriculture sectors should be targeted and realistic. Borrowing from the central bank is fuelling inflation. Monetary expansion is taking place inefficiently and improperly. Policy implementation of the government is becoming a big challenge for the economy. A double-digit growth rate of the GDP is possible if the physical infrastructural facilities like roads, railways and power are developed, in tandem with efforts for the pursuit of a healthy political culture in the country.

China generates 81 per cent of its electricity power from coal-based power plants while India generates 64 per cent, South Africa 94 per cent, Australia 76 per cent and the United States of America [USA] 49 per cent. Many years have passed but Bangladesh is yet to see a coal policy in place. Bangladesh requires 40,000 megawatts [mw] of power by 2025. Though the country has huge coal reserve at already explored Boropukuria Coal Mining Project at the northern part of the country, the government is failing to take necessary measures in establishing coal based power plant, which would greatly decrease country's foreign currency spending on import of petroleum products. On the other hand, expediting the implementation of the Nuclear Power Plant would also help Bangladesh in resolving the power crisis.

Following the current crisis of foreign currency reserve, most of the experts are suggesting the government to suspend all heavy-budget projects such as Padma Bridge, Bangabandhu International Airport, Elevated Expressway etc, in order to allow country's economy to get into a better situation, before the country import status gets crushed in three months, when the forex reserve may even drop below US$ 5 billion.

At the same time, Bangladesh government to mobilize and patronize the manpower recruiting agencies in the country in searching newer prospect for employment for Bangladeshi workers abroad. It may be mentioned here that, while manpower export to the Middle East is greatly declining in recent years, new prospect of exporting manpower is opening up in a number of East European and African nations.

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