Finance minister hopes reserves will be rebuilt in a short time

When the country's external position is in a gloomy state amid a depletion in foreign exchange reserves and a downgraded credit rating by global rating agency Moody's, Finance Minister AHM Mustafa Kamal remains optimistic about rebuilding the reserves in a short time.

While presenting the national budget for fiscal 2023-24, he pinned his hope on existing measures about price verification of imported goods, monitoring of LC (letter of credit) opening, and remittance incentives.

The day the finance minister placed the budget hoping for rebuilding the reserves, the country experienced the highest devaluation of the taka in a single day for the second time in a year by Tk1.5 to Tk106 per US dollar. The remittance data for May released on the same day shows a 10% year-on-year fall in inflow.

However, the minister also sees challenges in stabilising the exchange rate and improving the current account balance situation.

In his budget speech, the finance minister gave conflicting statements about hope and challenge over the forex market.

He said, "In April 2023, the International Monetary Fund (IMF) projected that the recovery process in the global context, especially in the countries important for our trade and remittances, has begun and will continue. At the same time, the IMF's projection also revealed that global inflation will moderate as the food, fertiliser, and fuel prices in the international market are returning to normal. Favourable changes in the global economy are making us hopeful."

At the same time he said, "Due to the unstable war situation in the world, there are signs of recession in the global economy. In this case, we have to face a difficult situation in the next financial year. We have to deal with the situation by formulating financial rules and implementation of it with great prudence and foresight."

The finance minister hinted at the continuation of import restrictions in the new budget to rebuild the reserves. On the other hand, he blamed falling imports for declining GDP growth.

"Due to the government's austerity measures and import control, the growth in the industry and service sector has decreased in the current fiscal year, and as such the GDP growth will decline slightly to 6.03 percent compared to the previous fiscal year according to the provisional estimate released by the Bangladesh Bureau of Statistics (BBS)."

"To rebuild the foreign exchange reserves, the current initiatives of verifying the accuracy of the price of imported items along with implementation, and monitoring of procedural requirements on LC opening, disposal, and related issues shall continue in the future.

"To encourage the use of formal channels in sending remittances, a 2.5% incentive is provided and remitter-friendly processes are being promoted including mobile financial services," according to the budget speech.

All fees required for sending remittances through Bangladeshi banks and exchange houses have been exempted, said the minister, adding, "Thanks to these initiatives, our remittance income is on the increase. The growth in imports has declined and is returning to normal. Concurrently, we are carrying out export promotional activities to augment our export income.

Steps are being taken to secure foreign loans in the pipeline, with the expectation that the reserve situation will improve in a short period of time, said the finance minister.

However, Moody's Investors Service recently downgraded Bangladesh's rating due to factors including import restrictions and deterioration in foreign exchange reserves, casting doubt on the feasibility of rebuilding the reserves.

Sayed Mahbubur Rahman, managing director of Mutual Trust Bank, expressed skepticism about the finance minister's optimistic outlook, citing the recession-like situation in many European countries, which reduces opportunities to increase exports.

He also highlighted concerns from manufacturers regarding the impact of import cuts on their operations and employees.

Financial sector reform

The finance minister in his budget speech said, "The BSRD is being developed by incorporating quantitative and qualitative characteristics and trends of key indicators to facilitate the identification and management of systemic and other risks in the financial sector."

"Preparation of a Financial Projection Model for the same purpose is in progress. Banks and other institutions in the financial sector must have in-built competencies and skills and advanced preparedness and recovery plans to deal with adverse situations."

"At present, the work of drafting the Bank Companies (Amendment) Act 2023 is ongoing. The issues of risk assessment and management in the financial sector are being appropriately incorporated in this Act."

"Banks have already been instructed to identify their potential procedural and other weaknesses/risks and submit a recovery plan to Bangladesh Bank along with a transition strategy. The government is formulating the "Secured Transaction Act, 2022" to increase the use of intangible assets as collateral."

"We will try to remove defaulted loans and other anomalies in the financial sector and continue our efforts to develop the banking sector. With this end in view, Bangladesh Bank is preparing various procedural guidelines according to BASEL-3, which will be implemented in phases. Following the overall improvement in the Covid situation, the policy exemptions allowed during the period of Covid are being withdrawn. Our government is working to ensure good governance and efficient management in the financial sector."