Weak policies also to blame for reserve crunch, food price surge: Economists

Apart from Ukraine war-induced supply chain disruptions and commodity price surges in the global market post-Covid pandemic, the government's weak policies also have been a major contributing factor to the present reserve crisis and food price rallies in Bangladesh, economists have said.

Controlling the dollar rate for a long period, followed by a sudden 25% increase, was one of the main causes of the foreign exchange reserve crisis in the country, they said while addressing a seminar, organised by the Economic Development Research Organisation (Edro) on Saturday.

At the same time, over-invoicing and under-invoicing in imports, smuggling money out of the country in various ways, and a rise in the use of hundi were all contributing to the reserve crisis, they added.

Speaking at the seminar titled "Reserve Crisis and Food Price Hike: A Way Forward, Bangladesh Perspective", Policy Research Institute Executive Director Dr Ahsan H Mansur said, "We saw our country's foreign exchange rate was kept almost unchanged for the last 12 years, due to which we could artificially inflate the per capita income, although it was not sustainable.

"Suddenly, the dollar rate has been raised by 25% over the past few months amid global pressure, causing both public and private sectors to come under pressure."

He added that the government's foreign debt increased by almost $1.75 billion. In addition, private companies which have foreign debts of about $27 billion, will have to pay an additional Tk75,000 crore due to the increase in the dollar rate.

That the forex reserves are steadily decreasing is a matter of concern but we've not yet reached a crisis point, he, however, mentioned.

Bangladesh has adequate reserves for food imports, he noted, adding, "At present, the country's foreign exchange reserve stands at $31 billion. Once the next ACU payment is made, it will decrease by another $1.5 billion." The ACU (Asian Clearing Union) payment gateway covers monetary transactions by its member countries for regional imports. The bills are cleared every two months.

He said that the advice of the IMF to the central bank is that the volume of reserves should not decrease until June and the government is working towards this goal.

Mentioning that $1.5 billion in foreign aid will come by next June as a support for the budget which will keep the country's reserves normal to some extent, he, however, stressed that the country must increase its forex reserves by any means.

Dr Suresh Babu, senior research fellow of the International Food Policy Research Institute (IFPRI) in Washington, while presenting the keynote at the seminar said supply chain disruptions caused by Covid-19, and then the Russia-Ukraine war have made it more difficult to source certain foods ingredients, causing food price hikes in the global market. Besides, the war-induced spikes in energy and fertiliser costs, and an increase in workers' wages also contributed to higher prices. Also, some regions experienced lower production due to drought.

And Bangladesh, being a net importer of the majority of its food grain, fuel, and fertiliser from Russia and Ukraine, remains one of the hardest hit by the Ukraine war, he observed.

Bangladesh having to buy these supplies at higher costs puts pressure on monetary reserves, he added.

Dr AKM Mokhtarul Wadud, associate professor at the University of Sydney, said Bangladesh's problem is that it has to import most food grains.

Due to massive imports and supply chain disruptions, the value of the local currency has fallen sharply, he observed, adding that a reserve crisis occurs when the taka depreciates more than the dollar.

Explaining the reason for keeping the dollar rate almost unchanged for a long time, Md Ezazul Islam, executive director of the Bangladesh Bank, said, "Before Covid, the price of the dollar was almost the same in our country for a long time. The reason behind this is that there is a kind of lobbying by businessmen, there is a policy of the government, and the policy of the central bank – all these matters are considered to depreciate the dollar rate."

But the central bank played a big role in the time of Covid. "During that time, the central bank bought about $8 billion from the market. If it is not bought, then the dollar rate would have fallen to Tk70 per US dollar.

"But imports have increased due to increased demand following the reopening of the economy post-Covid. As a result, the current account deficit reached its highest in FY22.

"After massive pressure was created on the dollars held by the central bank, the taka has been devalued hugely through gradual devaluations by Tk1 or Tk2."

Ahsan Habib, a senior reporter of The Daily Star, pointed out money laundering as one of the reasons for the reserve crisis.

Although the government kept refuting the issue of money laundering for many years, last year it acknowledged that money is being syphoned off out of the country and also has given the opportunity to bring the smuggled money back to the country by paying taxes.

"We must stop over-and under-invoicing in foreign trade by any means. At the same time, the use of hundi should be stopped to increase remittance through formal channels," he concluded.