June reserves to surpass IMF target. But at what cost?

Bangladesh's net foreign exchange reserve is going to cross the $14.7 billion target set for June by the International Monetary Fund (IMF) for the first time since the multilateral lender's $4.7 billion loan package was approved in February last year. 

The Bangladesh Bank will finalise its net reserve calculation today and the figure is likely to be $15 billion complying with the international threshold of three months of prospective imports.

Net reserve is calculated excluding short term liabilities from gross reserve as per IMF formula based on the Balance of Payments and International Investment Position Manual (BPM6).

This represents readily available cash from the gross reserves, which is expected to rise to $22 billion by the end of June, up from $19.4 billion on 26 June, according to central bank sources.

In April, the net reserve fell below the threshold to $12.8 billion from $19.6 billion at the end of June 2023, according to the IMF's second review report under the loan package. 

Meeting June target fueled inflation

However, Bangladesh achieving the IMF's June target is coming at the cost of import compression which slowed down the country's economic growth fueling inflation as the result of raising fuel cost. 

Bangladesh Bank governor in a letter to the IMF admitted that continued import compression has slowed economic activities, while persistently high global commodity prices and continued taka depreciation has kept inflation persistently high placing disproportionate burden on the poor.

The country's imports declined by 15.42% in the first nine months of outgoing fiscal year FY24, according to Bangladesh Bank data. 

Additionally, inflow of $2 billion loans of which $1.15 billion from IMF and $900 million from other sources as budget support is also helping Bangladesh to cross IMF's net reserve target. 

Besides, stopping dollar sales from the reserves is also helping. The Bangladesh Bank stopped selling dollars from the forex reserve from 8 May after introducing a new crawling peg mechanism by raising dollar price from Tk110 to Tk117 in a single day, the biggest devaluation of taka in the country's history. 

Tightening fuel imports

The central bank's controlled sale of dollars is also causing delay in foreign payment forcing Bangladesh Petroleum Corporation (BPC) to cut down fuel imports. 

Bangladesh Bank data shows petroleum import registered negative 8% growth in July-March of FY24 which grew by 16% in the same period of the last year.  

Negative FDI growth 

Bangladesh Bank's dollar saving stance has also put many foreign companies in trouble as they could not send back their income to their home country. As a result, they are reinvesting their earnings instead of bringing new investment causing negative growth in Foreign Direct Investment (FDI). 

Besides, many other foreign companies listed in the stock market are declaring low dividends as they could not send back their profit home. 

For instance, the cash dividend payout of ten multinational companies (MNCs) in Bangladesh dropped by 31% in 2023 compared to the previous year, as they faced difficulties in foreign currency transactions for remitting money to foreign shareholders.

Because of this, Grameenphone – the largest mobile operator of Bangladesh – also declared a 125% cash dividend for its shareholders for 2023, which is the lowest since 2010.

BAT Bangladesh also halved its cash dividend to 100% for the year 2023, marking the lowest rate in over a decade.

How BB calculated $27.15 billion reserve

Md Mezbaul Haque, Bangladesh Bank executive director and spokesperson, shared a provisional gross reserve figure of $27.15 billion with the media on 27 June.

He claimed that reserves increased with the inflow of $2 billion loans from IMF and other sources including Korea, IDB and IBRD. 

However, the figure is inflated as it is calculated on an old formula, BPM5, abandoned a decade ago, and the Bangladesh Bank has adopted a new BPM6 method from June.

As per BPM6, gross reserve will be $22 billion.

As per the IMF formula, any country will follow two calculations- gross and net reserve. IMF also provided the component for gross and net reserve calculation when it introduced BPM6 in the year 2012.

Bangladesh Bank ignored the new calculation for 11 years and published inflated gross reserves. Later, in 2023, the Bangladesh Bank adopted the new calculation to meet the condition of the $4.7 billion loan package. After the new calculation, Bangladesh Bank had to exclude $7 billion from gross reserves.

However, even after adopting the new calculation, the central bank again shared the inflated reserve figure of $27.15 billion.