Bangladesh’s economy remains stable with a new calculation method, dispelling rumors of Bangladesh Bank’s reserve decline.
Recently, there has been a surge of news claiming a drop in Bangladesh Bank’s foreign reserves. However, it is essential to truly understand the situation’s actuality to obtain greater insight. Bangladesh has adopted a new method for calculating its foreign reserves, which is based on the Balance of Payments and International Investment Position Manual (BPM6) of the International Monetary Fund (IMF).
The Bangladesh Bank’s foreign currency reserves have increased significantly over time. The reserves reached an extraordinary record high of $46 billion in the 2020-21 fiscal year, up from approximately $21 billion in the 2010-11 fiscal year. During the 2017-18 fiscal year, remittance inflows slowed temporarily, contributing to a progressive increase in foreign currency reserves.
Nonetheless, during this time period, rumors and speculations about a decline in reserves spread via social media and other channels, causing unwarranted concern. Unfortunately, some are utilizing this advantage to spread misinformation and engage in political games. Let’s examine the facts to understand Bangladesh’s foreign reserves accurately-
From exports to remittances: Understanding Bangladesh’s forex reserves
There are three primary sources that are crucial: exports, expatriate remittances, and foreign aid. These reserves are essential for funding Bangladesh’s import expenses, which play a vital role in the country’s economic stability.
The utilization of these reserves follows a systematic process. Businesses in Bangladesh import a variety of products by paying local institutions in Taka. In exchange, the banks provide them with foreign currency (dollars) from their reserves to cover import costs. Similarly, the government uses these dollars to pay for imports from other countries, such as petroleum, LNG, or coal, using the reserves to meet the necessary expenditures.
The reserves are also utilized to finance large government initiatives. When machinery, products, or consulting services are imported from abroad or when loan installment payments are due, reserve dollars are used to facilitate these transactions. The Padma Bridge, the Payra Power Plant, and several others are examples of such significant projects.
It is essential to observe that this utilization is a routine process that’s related to the flow of cash. As more dollars are received, they are utilized accordingly. During times when the development expenditure account has more funds, more spending occurs, and during lean periods, the spending is adjusted accordingly. The majority of the dollar inflow comes from export-related remittances, which account for approximately 4 to 5 billion USD.
The ADB loan and inclusion of BPM6 in reserve management
During the visit of the Prime Minister to the United States in 2022, the Asian Development Bank (ADB) offered Bangladesh a 9 billion USD loan for various initiatives. However, accepting this loan came with conditions. Bangladesh Bank was required to implement the BPM6 method of accounting for their dollar reserves in order to qualify for the loan.
The BPM6 is a method of accounting that calculates net reserves in dollars rather than gross reserves. This modification was required to comply with IMF conditions. For instance, at the end of June, the reserve figures included a distinct account for the Export Development Fund, which is intended for garment exports in times of need. In order for Bangladesh to qualify for the ADB loan, the IMF mandated that this account be excluded from the reserves.
In addition, the Bangladesh Bank lends from its reserves to a variety of entities, such as Biman Bangladesh Airlines, Payra Port, and two neighboring nations such as Sri Lanka. However, as stated by the IMF, the amount to be returned in the future cannot be included in the reserves now because Bangladesh does not have access to these funds currently. When these funds will be in hand, Bangladesh will be able to add them back.
The true reserve status
Due to the adherence to the IMF conditions mentioned above, Bangladesh Bank’s net foreign currency reserves are currently reflected as $24.7 billion, which is $6.4 billion less than the gross reserves. Nevertheless, this does not imply that the reserves are non-existent or insufficient.
The $6.4 billion is now being kept separately, not added to the gross foreign currency reserves. If the government determines that the Export Development Fund does not need these funds or returns the funds lent to Biman Bangladesh Airlines, Payra Port, or Sri Lanka, the reserve will revert to its previous condition.
It is essential to emphasize that this particular accounting method is adopted primarily for achieving the $9 billion ADB loan. Bangladesh has already received the initial installment of the loan, and over the next three years it will receive the remaining funds, which will be added to the country’s foreign currency reserves. Moreover, the Bangladeshi government has initiated transactions in yuan, rubles, and rupees with China, Russia, and India, respectively, to alleviate the pressure on reserve dollars.
Economy remains stable, misleading claims unravel
With the new reserve calculation in place and measures to strengthen the economy, Bangladesh’s current reserves are sufficient to cover approximately six months of import expenses, adhering to international standards.
Prime Minister Sheikh Hasina addressed Parliament and expressed optimism regarding the upcoming development of foreign exchange reserves. To bolster the reserves, the government has taken various steps, including discouraging superfluous imports and encouraging remittance income. Despite inflationary pressures and an increase in imports during the 2021-2022 fiscal year, the reserves reached a record high of $48.06 billion in August 2022. However, they were subsequently declined due to trade balance pressures. To control inflation, the central bank has used foreign exchange reserves to maintain the taka’s value relative to the US dollar, resulting in a rate of reserve depletion.
Unfortunately, some individuals and organizations have utilized the new method of calculation to spread false information and indulge in political games. They have misinterpreted the decline in gross reserves due to the new accounting method to suggest that Bangladesh lacks sufficient reserves, which is inaccurate.
The country’s economic position remains stable and well-managed, contrary to false claims.
In conclusion, despite recent controversies, Bangladesh’s economy remains stable and resilient. The IMF’s new method of calculating reserves provides a more accurate reflection of the country’s position. Misinformation for political gains should not overshadow the reality of substantial reserves, as Bangladesh’s economic state is secure, and promising measures are in place for the future.