Reserves fall below $30b after ACU payment

The country's foreign exchange reserves are set to come down to the $29 billion mark as the Bangladesh Bank is clearing import bills of $1.18 billion to the Asian Clearing Union (ACU).

In a SWIFT message on Wednesday afternoon, the central bank gave its approval to the Federal Reserve Bank of the United States to process the ACU payment, Bangladesh Bank Spokesperson Md Mezbaul Haque told The Business Standard.

Infographic: TBS

"The ACU payment process is expected to be completed within Monday next. The payment has increased this time for higher imports amid Ramadan and Eid-ul-Fitr although it had been on a fall since July last year," he added.

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.

Earlier in March, the Bangladesh Bank cleared $1.05 billion in import bills to the Union, which brought down the reserves to $31.15 billion. With the latest payment, the reserve may stand at approximately $29.8 billion. On 2 May, it was $30.98 billion, according to available latest central bank data.

Infographic: TBS

In August 2021, the country's reserves hit a record high of $48 billion. Since then, it has been on a gradual fall with some fluctuations due to rising imports and falling remittance and export earnings amid reopening after Covid-19 restrictions. The situation deteriorated further after the beginning of the Russia-Ukraine war.

"Foreign exchange reserves declined sharply in 2022 but it has been decreasing at a slower pace since early 2023. Still, it hovers near $30 billion, which cannot be considered negative," said Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue.

"There is a possibility of increasing reserves in the coming days because the remittance inflow is expected to be higher before the upcoming Eid-ul-Adha. The central bank is also increasing dollar rates for remittance and exports gradually, which can help further surge," he told TBS.

Golam Moazzem said the $4.5 billion loan from the IMF and expected loans from the World Bank, the ADB and Japan will increase reserves significantly.

Global experts always recommend that a country should have reserves to meet its import expenditure for at least three months. In terms of current gross reserves, Bangladesh has the ability to pay the expenses for about five months.

According to the International Monetary Fund formula, Bangladesh, however, needs to deduct a total of $8 billion from gross reserves.

In that case, the central bank's net reserves will be slightly over $21.8 billion, which can cover import costs for four months.

Meanwhile, as part of efforts to maintain standard foreign exchange reserves, the government imposed bans on luxury items in the middle of the last year, which helped decrease letter of credit openings.

According to the central bank, LC openings fell by nearly 25% to $68.84 billion in the nine months (July-March) of FY23, which was $51.36 billion in the same period of the last year.

"While our imports decreased throughout FY23, we have had to pay additional import bills due to global hikes in prices amid the Ukraine-Russia war," a senior Bangladesh Bank official told TBS.

The central bank data said sources of foreign currency earnings are dwindling amid depleting reserves. According to the latest data, Bangladesh's merchandise exports plunged by 16.52% last month as apparel demand fell across major markets. The country's export sectors earned $3.95 billion that month, which was $4.73 billion a year ago. Remittances declined by 19.44% to $1.68 billion in April compared to the same period last year due to a weaker dollar rate.

Besides, net foreign direct investment (FDI) fell by 35.56% in the December quarter of 2022.