Forex reserves slide further to $31b

The country's foreign exchange reserves declined by $1.16 billion to $31.14 billion on Thursday after over $1 billion in import bills pending with trading partner countries were cleared on Tuesday.

The current reserves can cover the country's imports for nearly five months if monthly imports remain within the range of $6 billion. But, the reserve coverage would go down if the repayments of other loans are taken into account.

The Bangladesh Bank could not stop the erosion of forex reserves even after a drastic cut in import expenditure as foreign currency outflow was higher than inflow, said a senior executive of the central bank.

The central bank cleared import bills to the tune of $1.05 billion to foreign countries on 7 March this year, which was around $2 billion last year.

Import bills, also known as Asian Clearing Union (ACU) payments, declined substantially due to import restrictions imposed by the Bangladesh Bank to save reserves.

The ACU payment gateway covers monetary transactions by its nine member countries – Bangladesh, Bhutan, India, Iran, the Maldives, Myanmar, Nepal, Pakistan, and Sri Lanka – for regional imports. The bills are cleared every two months.

Even though Bangladesh's forex reserves improved slightly after the IMF (International Monetary Fund) released the first tranche of about $476 million of its $4.7 billion loans on 1 February this year, depletion started again as foreign loan inflow to the private sector was negative when payment to foreign lenders was higher, according to central bank data.

The country's reserves of foreign exchange have declined by nearly $13 billion from $44 billion on 9 March last year.

Although the reserves now stand at $31.14 billion, it would be $19 billion if calculated following the IMF's formula.

According to IMF's formula which the Bangladesh Bank has to adopt by this June as per loan conditions, the central bank will have to exclude some loan components worth $8 billion and liabilities of $4 billion from its forex reserves.

The reserves have kept sliding at a time when the Bangladesh Bank is under pressure to rebuild it to meet the IMF condition of maintaining net reserves of $24.46 billion in June – when the lender will conduct the first review of the performance criteria of the central bank.

The net reserves, which are readily available for intervention in the foreign exchange market, will have to be calculated according to the new formula prescribed by the IMF.

Although the dollar crisis eased in the forex market amid low imports and higher exports and remittance inflows, it could not build the reserves as dollar inflow was not surplus yet, said another senior executive of the Bangladesh Bank.

Dollar inflow hit the reserve only when the Bangladesh Bank buys surplus greenback from banks, said a senior executive of the Bangladesh Bank.

Monthly imports came down to $5 billion in February this year from above $8 billion in the same period last year, reducing pressure on dollar selling from reserves, the official added.

The Bangladesh Bank on Thursday sold $60 million to banks to meet their shortage when the selling figure was above $100 million a month back, according to the central bank data.

The negative financial account is eroding the forex reserves fast as the central bank now needs to make import payments directly from reserves.

The country's financial account deficit doubled just within a month in January this year due to negative growth in foreign loan inflow, triggering an alarm for the plummeting forex reserves amid the dollar crisis.

The financial account deficit widened to $1.19 billion in the July-January period of the current fiscal year from $592 million in the July-December period, according to the Bangladesh Bank.

The financial account in the last fiscal year's July-January saw a healthy surplus of $8.6 billion.

The rising deficit in the financial account put pressure on overall balance of payments even after a negative import growth.

The trade deficit widened by 8.8% to $13 billion in July-January from $12 billion in the July-December period of the current fiscal year.

However, the trade deficit declined by 28% from $18 billion in the July-January period of the last fiscal year.

The current account deficit, however, narrowed slightly to $5 billion in July-January from $5.2 billion in the July-December period.

"When both the financial account and the current account stay in deficit, it is very alarming as the country will have to make external payments from the forex reserve, which will cause faster erosion of the reserve," said the central bank officer on the condition of anonymity.

Bangladesh Bank's data show that the long-term foreign loan position was negative $150 million in the July-January period of the current fiscal year while the inflow was $1 billion in the same period of the last year. The negative position reflects that outflow is higher than inflow owing to loan payments.

Short-term foreign loan position turned to negative $771 million in the July-January period of the current fiscal year compared to the inflow of $1.7 billion in the same period of the last fiscal year, according to the Bangladesh Bank.