BB chief moves to IMF, bilateral sources to rebuild reserves

Infographics: TBS

Bangladesh Bank Governor Abdur Rouf Talukder, in his frantic efforts to rebuild foreign exchange reserves and turn the financial accounts into positive from over a $2 billion deficit, now plans to visit different countries including India and Saudi Arabia to take loans.  

He wants to build on the success of his negotiation with the International Monetary Fund in Marrakech of Morocco earlier in October to move forward to explore bilateral fund sources, according to one of the bankers with whom he shared his plans.

Meanwhile, an IMF review team also concluded its two-week Dhaka visit in the second week of October in a positive note that makes the central bank optimistic of getting the $681 million second tranche of the lender's $4.7 billion loan package approved by December.

On another front, the payment settlement with India in rupee, introduced in July to reduce dollar dependency, has started to work slowly with businesses settling transactions in rupee on a small scale, and the governor now plans to accelerate rupee trade by taking support from the Indian government.

In a recent meeting with 15 bankers, the Bangladesh Bank governor shared his plan, saying his focus is to turn the financial account into a positive one, according to the meeting source.

Quoting the governor, a managing director of a private bank who attended the meeting said the governor is in negotiation for getting Rs2 billion to facilitate trade in Indian currency between India and Bangladesh to ease pressure on dollar.

The governor is also planning to visit Saudi Arabia to negotiate for a loan of at least $2 billion.

The banker mentioned that Prime Minister Sheikh Hasina sought loans from Saudi Arabia during her meeting with the Saudi Crown Prince and Prime Minister Mohammed bin Salman in New Delhi on the sidelines of the G20 Leaders' Summit in September.

The central bank chief also informed bankers that he will not let free float exchange rate at this moment as outflow is higher than inflow which will keep the dollar rate rising.

The Business Standard verified the meeting discussion from several bankers who attended the meeting.

Citing an example of Pakistan, the governor told the bankers that the country recently received $2 billion in financial support from Saudi Arabia to boost its foreign exchange reserves.

Saudi Arabia had pledged the fund in April, but released it in July only after being sure the IMF bailout would be forthcoming, which would unlock more bilateral and multilateral financing, the country's finance minister said.

The meeting with top bankers took place amid a series of meetings the central bank chief is having with economists and financial experts to find a way out to bring macroeconomic stability.

The Bangladesh Bank has stopped printing money and raised policy rates to make money costlier following the suggestion of economic experts. Lending rates started to go up as per expectation which is assumed to depress demand and ultimately calm down inflation as seen in many economies following global central banks' measures.

Why rebuilding reserve looks tough

The governor gave the bankers a grim picture of the country's external balance, mentioning they have reduced the current account balance by $15 billion to $3 billion in FY23 from $18 billion in FY22. However, the financial account deficit is a new thing as Bangladesh Bank experienced a deficit of this account for the first time in the last 14 years. 

The central bank's rigorous efforts to reduce import expenditure and save foreign exchange reserves have yielded little as the financial account deficit continues to widen, crossing $2 billion in July-August of the current fiscal year which was surplus over $15 billion in FY22. This was because of negative growth in foreign fund inflow intensifying pressure on the country's external position.

The financial account deficit has resulted in an $8.6 billion loss in foreign exchange reserves in FY23 as the Bangladesh Bank has had to settle all foreign payments directly from the forex reserve. The gross reserve came down to below $21 billion in October this year which can cover the imports of four months.  

The foreign exchange reserve is the last resort for foreign payments when the financial account also turns into a deficit.

During the July-August period of the current fiscal year, both the current account balance and the financial account were in deficit forcing the central bank to make payments from reserves and further worsening the external position.

High trade credit which is measured from export and import volume is blamed for the financial account deficit as remittance from $12 billion exports did not come home in FY23. 

In fiscal 2022-23, export receipts totalled $43 billion, a figure 22% lower than the export shipment value of $55.6 billion, as reported by the Bangladesh Bank.

This high mismatch in export shipment and receipt turned trade credit to negative $6.5 billion in FY23 which was only $438 million negative in FY22, central bank data shows. 

Why are financial accounts negative?

Syed Mahbubur Rahman, managing director of Mutual Trust bank, told the Business Standard that a huge negative in trade credit is one of the major reasons for deficit in financial accounts. We found nearly $10 billion mismatch between export shipment and realised value which caused negative trade credit. 

Bangladesh Bank is also concerned about a huge gap in export realisation and they are instructing banks repeatedly to take measures to bring back export proceeds, he said. 

But the problem we are experiencing is that buyers are deferring payment to exporters, he added. Previously, import payment was deferred but now it is opposite as export payments are being deferred causing dollar pressure in banks. As a result, banks are facing huge forced loans as exporters could not make LC (Letter of credit) payments.

On the other hand, private banks are not borrowing from foreign sources due to the rise in SOFR (reference rate for foreign loans) rate, which rose above 5% from less than 1% before 2022, he said. Moreover, rating downgrades from global rating agencies increased borrowing cost for Bangladeshi banks, he added. 

Bangladesh Bank data shows that private bank borrowing from foreign sources, a financial account component, was negative $2.7 billion in FY23 which means banks are paying more than borrowing. The borrowing was above $1 billion surplus in FY22.

Medium and long term loan growth, another major component of financial accounts, was negative 11.44% in FY23, central bank data shows.