Forex reserve measures dubbed not enough

A series of measures taken recently to ease the pressure on the country’s foreign exchange reserve were overdue but are inadequate, said economists on Saturday.

More measures, especially in the fiscal area, should be taken to keep the country’s forex reserve at a healthy level, they said amid a plummeting forex reserve at home, volatility on the global commodity market arising out of the Russia-Ukraine war and a change in the Sri Lanka government over the worst-ever debt crisis in that country.

‘An extensive coordination among government agencies, both in the fiscal and monetary areas, is a must to tackle the alarming situation,’ said former Bangladesh Bank governor Salehuddin Ahmed.

The National Board of Revenue should also be made ‘hyperactive’ to check money laundering through misdeclaration of imports, said the former BB governor who was instrumental for Bangladesh in dealing with the global commodity market volatility because of the record price of fuel oils hitting $143 per barrel in 2007–08.

There were instances that authorities seized containers that were imported with misdeclaration with many of them found empty, he added.

The country suffered capital flight worth $ 81.74 billion from 2006 to 2016 through overinvoicing of imported goods, according to the US-based Global Financial Intelligence report released in January 2019.

Meanwhile, the country’s forex reserve has dropped to $ 41.9 billion, a 17-month low, from $48 billion in August 2021 following a surge in import payment by a whopping 46.7 per cent, which also caused Bangladesh a $22.31 billion trade deficit in the July–February period of the outgoing financial year.

The country’s import payment capacity has shrunk —to about six months from eight months — after the Russia-Ukrain war that began in late February made the import of fuel oils, foods and fertiliser costlier for the country. 

Hot on the heels of the reserve decline, the Bangladesh Bank has recently increased LC margins by up to 75 per cent for import of luxury goods while the Finance Division has slapped a ban on non-essential overseas tours for government officials to save the greenback for the highly import-dependent country.

Centre for Policy Dialogue distinguished fellow Debapriya Bhattacharya called the measures piecemeal which according to him may not be adequate to offset the looming macro-economic challenges in forex reserve management.

‘The measures are too short and too few,’ he said, adding that numerous areas, including revenue generation and subsidy for electricity generation through costly rental power plants, on the fiscal side could be streamlined.

The country’s revenue-GDP ratio has been hovering below 10 per cent for  the past one decade, lowest among many countries, while it is paying a vast sum of money to the idle rental power plants as capacity charge.

A report released by the Bangladesh Working Group on External Debt in March found that some Tk 72,567 crore was doled out to the private power producers in capacity charge over the past decade.

Former World Bank Dhaka Office chief Zahid Hussain suggested that the government might start fiscal reform in consultation with the World Bank, the Asian Development Bank and the International Monetary Fund for more budget support.

Unlike project loans, budget support comes with a lot of flexibility for the government in using the fund, he said.       

Economists, however, appreciated the sensitivity and awareness shown by the government in maintaining a healthy forex reserve following the unprecedented foreign currency crisis in neighbouring Sri Lanka that led the country to the brink of bankruptcy.

Besides, the violent protests in that country have forced the prime minister and the cabinet to step down.

The economists said that the crisis in Sri Lanka was an eye opener for Bangladesh.

They once again underlined the importance of lowering import dependence, especially for goods that are unnecessary and could be substituted by local production.

Former Bangladesh Institute of Development Studies director general MK Mujeri said that the government had a major role to play in popularising locally grown consumers goods.

He said that quality of the local consumer goods should be ensured so that consumers did not look for imported items.

The country’s import payment surged to $9.7 billion in February.

The payment was almost double the monthly average import payment in 2019.

According to Bangladesh Bureau of Statistics monthly update on the external trade, high-end cars, ceramic products, glassware, vanity cases, bedding items, chocolate, dairy products and fruits accounted for a considerable portion of monthly imports until the Bangladesh Bank in April imposed a 25 per cent margin for opening letters of credit against items considered non-essential.   

MK Mujeri said that the BB could increase the LC margin further for selected imported goods as he was referring to the previous forex reserve crisis in 2001 when the country’simport payment capacity plummeted to less than one and a half months.

BB spokesperson Serajul Islam said that Bangladesh had resorted to many options to safeguard the hard-earned forex reserve.

He hoped that the current measures would be useful in dealing with the high demand for dollars.

News Courtesy:

https://www.newagebd.net/article/170631/forex-reserve-measures-dubbed-not-enough