More strain on reserves as unrealised export proceeds hit all-time high of $3b

Infographic: TBS

When the country's reserve is under pressure amid slowdown in foreign currency inflow, the volume of unrealised export proceeds increased to a highest ever amount of $3 billion in the July-February period of the current fiscal year, triggering concern of the Bangladesh Bank.

Though Bangladesh's export continued to grow in the first nine months till March of the current fiscal year even in global headwinds, it could not reduce the pressure on balance of payment due to the shortfall in realised export value.

The country's balance of payment statement for the current fiscal year's July-February period was prepared considering export shipment value of $34.96 billion, the realised export proceeds were $3 billion short at $31.96 billion, according to the central bank's data.

The gap between realised export value and shipment value has been widening since the beginning of the current fiscal year due to deferred payment by buyers amid rising inflation in Europe and America, the biggest export market for Bangladesh, said a central banker who is involved with preparing the balance of payment statement.

Trade credit, a component of balance of payment statement, which reflects the gap between realised export value and shipment value was surplus $969 million in July-February of FY22 which means this amount of export proceeds were recorded previously but received later, according to the Bangladesh Bank data.

Earlier, an IMF review team visiting Dhaka during 25 April - 02 May had a meeting with Senior Secretary of the commerce ministry Tapan Kanti Ghosh and inquired about non-repatriated export proceeds of $3 billion.

The increasing gap between export shipment and realised value raised concern for the central bank prompting the authority to tighten rules for delayed encashment of export proceeds.

In a circular issued in March, the Bangladesh Bank said that exporters will get the exchange rate for export proceeds encashment as of the date at which the proceeds should have been realised – meaning the exporters will no longer enjoy the higher exchange rate for delayed realisation.

"To bring discipline in the realisation of export proceeds, it has been decided to initiate appropriate measures in cases where export proceeds are not realised within the prescribed period," said the circular.

Explaining the circular, a senior central bank official, wishing anonymity, told The Business Standard that many exporters have been delaying encashment to gain higher exchange rates amid rising dollar prices, which has now become a trend resulting in the gap between export shipment value and realised value to widen.

Explaining the reason behind rising unrealised export proceeds, a top banker who looks over trade of one of the largest private commercial banks told The Business Standard that the buyers' payment behaviour has changed amid the global economic crisis that ensued after the Russia-Ukraine war.

He said buyers now want to pay after selling 50% to 60% of their products as a huge volume of goods has piled up in their stores due to business slowdown with rising inflation.

Bangladesh's 80% exports are contract based where buyers rule the payment mode. Payment for such orders depends on the buyer-seller relation. In case of LC (Letter of Credit) based export, banks from the buyer's side must pay the seller's bank on time, said the official.

"There is an obligation for buyers to make payment to sellers in 120 days of product shipment in case of export through LC but in case of contract there is no obligation for payment schedule," the banker clarified and added that as major exports are contract based, buyers are deferring payments causing the gap in realised export proceeds and shipment value to widen.

The bank official also said the trend of deferred payment is rising and the unrealised value will rise in the near future.

"Bangladeshi exporters are the ones suffering as they are paying interest against their loan until they are paid. On the other hand, buyers are enjoying financial benefit from deferred payment," he said, adding, "$1 billion to $1.5 billion export proceeds were unrealised with the payments in the pipeline, but the figure has now doubled due to deferred payments."

Sharing his banking experience, he said export orders slowed down significantly which reflects in LC opening and exporters' financial transaction patterns. Garments exporters were supposed to have full booking of orders up to October this year but most exporters are not even fully booked up to July.

So export earnings are likely to fall in the coming months which will intensify pressure on the reserve, he said.

Meanwhile, the Bangladesh Bank has been withdrawing EDF (Export Development Fund) loan from the market as per the IMF suggestion and it introduced a new fund in local currency. This will also increase cost for exporters as they have to buy dollars for payment which will increase their cost amid rising dollar price, he added.

Garment exporters have been facing a decline in order volume from international clothing retailers and brands because of the persistently higher cost of living in the western world and a pile-up of apparel stocks at stores.

Exporters say the orders for the April-June season declined by 20% to 40% because of higher inflation in the western economies stemming from the ongoing Russia-Ukraine war.

Faruque Hassan, president of Bangladesh Garment Manufacturers and Exporters Association (BGMEA) said that export order flow slowed in March and it will continue till June.

Impacts of shortfall in realised export proceeds

A top private banker said rising unrealised export proceeds is causing a dollar crisis in banks. As a result, banks are buying remittances from the exchange houses at higher prices.

According to the Export Promotion Bureau (EPB) data, released on Sunday, merchandise exports of Bangladesh grew by 8.07% to $41.72 billion in the July-March period.

Also, on the same day, the Bangladesh Bank reported a 4.83% year-on-year increase in remittances for the first nine months, amounting to $16.03 billion.

However, the dollar market is not stable yet as some banks are settling import payments at above Tk110 amid the dollar crisis.
Country's external position has been worsening due to slow inflow of foreign currency which reflects in widening the financial account deficit.

The Bangladesh Bank's rigorous efforts to reduce import expenditure and save foreign exchange reserves have yielded little result as the financial account deficit continues to widen, crossing $1.5 billion in July-February this fiscal year.

According to data from the Bangladesh Bank, the financial account deficit went up by $350 million in February alone from $1.19 billion in the July-January period because of negative growth in foreign fund inflow.

Amid this dwindling reserve, the Bangladesh Bank cleared $1.8b to the Asian Clearing Union on Wednesday bringing down the reserve to $29b, according to the central bank sources.

The financial account deficit resulted in an $8 billion loss in foreign exchange reserves during the July-January period, as the Bangladesh Bank had to settle all foreign payments directly from the forex reserve.

The foreign exchange reserve came down to $32.26 billion in July-February of FY23 from $46 billion in the same period of FY22. The reserve coverage for import came down to 4.9 months from 6.4 months during the same period, according to the Bangladesh Bank data.