Reserve touches $45b from $40b in 6 months

The foreign exchange reserves have continued to grow and touched $45 billion from $40 billion in six months.

On 8 November, the foreign exchange reserve hit $40 and it stood at $45.105 billion on Monday, according to sources at the Bangladesh Bank.

Analysts believe that the increase in foreign exchange reserves is due to high growth in remittances, lack of private investment in the pandemic, reduction in import expenditure and drop in travel and medical expenses abroad.

From $40 billion in November, the reserve exceeded $44 billion on 24 February and reached $44.97 on Sunday.

As per international standards, a country has to have reserves equal to three months of import expenditure. With the amount of reserve that Bangladesh has now, it is possible to pay the import cost for more than eight months.

The high flow of remittances by expatriates is one of the reasons for increasing the reserves. In just two days, on 1-2 May, remittances worth $154 million was received. Remittance inflow in April was $2.06 billion, an 89% year-on-year up.

On the other hand, in July-April of the current financial year, there was a year-on-year increase of remittance by 39% to stand at $20.67 billion, which is about $2 billion more than the 2019-20 fiscal year.

Regarding reserves, Dr Zahid Hossain, a former lead economist at the World Bank (Dhaka office), told The Business Standard that remittances were playing a role in increasing reserves. In addition, the number of people going out for treatment and medical treatment has decreased, export earnings have increased slightly and the impact of the overall balance of payments on foreign trade has been increasing.

According to the central bank, the balance of payments for the eight months of July-February of the current fiscal was $6.88 billion, up from $214 million in the same period last year.

During July-February of the current financial year, the expenditure on imports was $2.12 billion, which was $2.60 billion in the same period last year. Of this, imports of intermediate raw materials used in industrial production increased by 5% but imports of capital equipment decreased by about 21%.

Zahid Hossain said that the decline in the import of capital equipment shows that there is no investment in the country. If the Covid-19 situation is resolved, the import expenditure increases and the reserves will decrease too.

Adequate reserves are a matter of relief for the economy. It contributes to the stability of the foreign exchange market, he added.

In this context, a recent report by the central bank said that the macro-economy has remained stable due to the strong reserves in the crisis-ridden economy.

However, Dr Mustafizur Rahman, an economist and Distinguished Fellow of the Centre for Policy Dialogue, said that this stability is right only in the case of foreign exchange rates.

He told The Business Standard that the stability of the overall economy needs to be considered with investment. As a result of the Covid-19, now the new industry is being set up. The impact will be felt everywhere – from employment to income growth.

In November last year, Finance Minister AHM Mustafa Kamal expressed hope that the foreign exchange reserves would exceed $50 billion this year.

He also said that the reserve money would be used for government projects.

In light of this, in mid-March this year, the government set up an infrastructure development fund with $2 billion annually from the reserves. In the first phase, the Payra Port Authority has received a loan of around Tk5,000 crore from this fund.