Forex reserves fall to $20b after clearing Nov-Dec ACU payment

Bangladesh's foreign exchange reserves have dropped to $20 billion after a $1.67 billion payment to the Asian Clearing Union (ACU) for November-December imports.

The payment was made on Thursday (9 January), according to a senior Bangladesh Bank official.

This figure, calculated using the IMF's BPM-6 method, is lower than the central bank's estimate, which shows reserves at $24.9 billion.

Bangladesh clears its ACU bills every two months. The previous payment of $1.5 billion, made on 10 November for September-October imports, reduced the country's forex reserves to $18.46 billion under BPM-6 calculations. However, reserves recovered in the subsequent months.

Imports from ACU countries increased by 11.33% in November-December compared to the previous two months, Bangladesh Bank data shows. 

The ACU is a Tehran-based institution for settling payments among nine countries – India, Bangladesh, Bhutan, Iran, the Maldives, Myanmar, Nepal, Pakistan and Sri Lanka.

This surge in imports is viewed positively by bankers as an indicator of a healthy foreign exchange position within the banking sector.

A private bank official told TBS, "The dollar crisis in banks has eased significantly. Additionally, the central bank has relaxed several import conditions, allowing traders to import as needed. This is a shift from the challenges traders faced with imports since September 2022."

"We expect to import more in the coming months because the outstanding payments owed by local banks to foreign banks were settled in December last year. As a result, payment pressure will no longer affect the new year," the official added.

Bangladesh Bank spokesperson Husne Ara Shikha told the media earlier this month that forex reserves are on the rise. As of 3 January, reserves stood at over $26 billion, supported by increased remittances through banking channels and the addition of $500 million from Asian Development Bank (ADB) loans.

According to central bank data, import LC (letter of credit) openings and settlements grew by 15% and 20%, respectively, during the first five months of the 2024-25 fiscal year, compared to the same period the previous year.

In the July-November period of FY25, LC openings reached $4.54 billion, up from $3.94 billion in the corresponding period of FY24. Similarly, LC settlements rose to $4.17 billion from $3.48 billion during the same timeframe.

Bangladesh's reserves surged to a record high of $48 billion in August 2021 during the pandemic-led economic shutdown. However, reserves started to fall gradually in the post-pandemic period driven by a spike in import payments.

Forex reserve erosion persisted until 5 August 2024. However, following the political shift, reserves began to rise, driven by increasing remittance inflows. Additionally, the Bangladesh Bank's decision to halt dollar sales from reserves contributed to the upward trend.

Bangladesh received a record $2.64 billion in remittances in December last year, making it the highest remittance inflow for a single month in the country's history.

During the first half of FY25 (July-December), the country received $13.78 billion in remittances, a 27.59% rise from $10.8 billion during the same period last year.

An official from the Foreign Exchange Policy Department of Bangladesh Bank told TBS, "Banks' foreign currency holdings are improving. At the start of 2024, around 20 banks faced a short position in foreign currency, but this number has now dropped to 8-10 banks, while the rest are in a long position."

Following the change in government on 5 August, the country's banks had $3.7 billion in outstanding liabilities to foreign banks, placing several at risk of bankruptcy. Simultaneously, foreign credit rating agencies downgraded Bangladesh's rating, prompting international banks to reduce their foreign currency usage limits for the country.

In the past five months, domestic banks have repaid around $3.3 billion of these overdue liabilities, with $2.5 billion paid by public sector banks. However, around $400 million in liabilities remain outstanding.