Rebuilding forex reserves challenging, still lofty $32b goal set for FY25

Finance Minister Abul Hassan Mahmood Ali in his proposed budget for FY25 yesterday mentioned that rebuilding foreign exchange reserves will be challenging in the coming months as high interest rates in advanced countries may continue for a while.

However, his assumption contradicts with the ambitious target of $32 billion in gross reserves set in the budget. 

When the Bangladesh Bank could not stop the reserve erosion even after introducing the crawling peg mechanism, the new target is more than 70% from the current reserves of $18.67 billion as of 5 June, according to central bank data.

The foreign exchange reserves declined by more than $1 billion from $19.8 billion since the crawling peg was introduced on 8 May.

"The high interest rates prevailing in the advanced economies is one of the major reasons for the dwindling foreign exchange reserves in Bangladesh," according to the Medium-Term Macroeconomic Policy Statement placed with the proposed budget.

"This high interest rate regime in the advanced countries may continue for a while and hence it will be challenging to increase reserves in the coming months," according to the statement.

The budget target for foreign exchange reserves is far behind the reality. For instance, the gross forex reserve target was $42 billion in the actual budget for FY24 which was revised down to $29 billion in the revised budget. However, the revised figure is still unrealistic based on the current foreign currency inflow.

However, the finance minister set the ambitious goals of reserves riding on the crawling peg which already seemed to have failed to increase the inflow of foreign currency.

The budget documents mentioned that to contain the persistent foreign exchange pressure, the Bangladesh Bank as well as the government took various policy measures; aided by a steady inflow of remittances and lower import payments.

"On 8 May 2024, the Bangladesh Bank introduced the 'Crawling Peg Exchange Rate System' for spot purchase and sale of US dollars. Under this system, a Crawling Peg Mid Rate (CPMR) has been set to Tk117 per dollar. Under this arrangement, the BB would retain the option to intervene to prevent the exchange rate from breaching the established band limits," read the budget documents.

It also read, "However, it is expected that the introduction of Crawling Peg Exchange Rate System will help stabilise the exchange rate in near future. Hence, the foreign exchange reserve is also expected to grow in the following years."

The target of high import growth and low export and remittance also contradicts with the lofty reserve target. 

In the budget documents, import growth was projected to be 10% in FY25 turning from negative growth of 10% in FY24. On the other hand, the target for export growth remained unchanged at 8% and remittance growth was revised down to 7% from the previous 10%.

The central bank slowed down reserve erosion only through restricting imports in the last one year. However, in the new budget, the government is expecting to let imports grow to match with the expected GDP target of 6.75% which clearly contradicts with the ambitious reserve target. 

The finance minister assumed that exports and inward remittances would remain impressively stable despite various global uncertainties. However, he did not explain how export growth would remain stable when it fell by 16.06% year-on-year in May amid a slump in global demand.