According to the BPM-6 manual of the International Monetary Fund, Bangladesh’s foreign exchange reserve rose to $20.4 billion. On the 15th of December 2023, $689 million from the International Monetary Fund (IMF) and $400 million from the Asian Development Bank (ADB) were incorporated into the forex reserves. The gross reserves stood at $25.82 billion.
“Currently the country’s reserves amount to $20.4 billion, which was $19.17 billion on Thursday. The gross reserves stood at $25.82 billion.”
–Mezbaul Haque, Managing Director and Spokesperson, Bangladesh Bank
You can also read: IMF Gives Thumbs-Up to Reforms, Clears Path for 2nd Loan Tranche
To address a shortfall, the IMF modified conditions for the loan’s third tranche on Friday, 15th December 2023. Originally set at $26.81 billion for December 2023, the target was reduced to $17.78 billion. The new condition for maintaining net reserves was established in the first review report under the $4.7 billion loan package. The first tranche of the loan package, cleared on 30th January, amounted to $447.8 million received on 2nd February. The complete sum will be disbursed in seven installments by 2026.
The fourth installment of the loan is scheduled for December 2024, requiring an increase in net reserves to $20.20 billion by the end of June.
IMF Release Second Tranche of $4.7 Billion
The Executive Board of the International Monetary Fund (IMF) granted approval for the second tranche of the USD 4.7 billion loan allocated to Bangladesh during its meeting at the IMF’s head office in Washington on December 12, 2023. This financial boost is a crucial step for Bangladesh, given the recent decline in gross reserves.
According to the updated guidelines of the IMF, the gross reserves of Bangladesh decreased to approximately $21.5 billion in September 2023. By December 6, the reserves had further reduced to $19.1 billion. In response to this decline, Bangladesh is actively seeking financial support from international institutions, implementing a stringent and precautionary strategy.
A positive indicator amidst this situation is the influx of remittances totaling $3.9 billion over the past two months. This trend signals a concerted effort to shift focus to Resident Foreign Currency Deposit (RFCD), with the aim of bringing dollars, currently outside the formal banking system, back into the sector.
As part of its strategy to fortify reserves ahead of the January 7 elections, the Bangladesh Government has successfully secured funds. This includes $689 million from the International Monetary Fund (IMF), $400 million from the Asian Development Bank (ADB), $90 million from a South Korean fund, and an additional $62 million from various donor agencies. In total, 131 million dollars (1.31 billion) will be added to the reserves this month, contributing to the country’s economic stability.
Remittances and Exchange Rate Dynamics
As of December 17, 2023, the central bank has reported that the gross foreign reserves of the country stand at $25.82 billion, signaling an increase from September. The calibrated monetary policy implemented by the Bangladesh Government has played a pivotal role in fortifying this financial buffer. The adoption of greater exchange rate flexibility has effectively alleviated foreign exchange pressures, resulting in a shift towards a neutral fiscal stance.
Zahid Hossain, the former Chief Economist of the World Bank’s Bangladesh Residential Mission, underscores the IMF’s meticulous assessment of each installment before disbursement. Notably, concessions on reserve and revenue targets were granted during the second tranche, but Hossain anticipates their reevaluation in the subsequent third installment. Emphasizing the imperative to bolster export income and remittance flow, he underscores the importance of preventing a decline in reserves.
Moreover, remittances to Bangladesh have experienced a noteworthy 21 percent year-on-year increase. This surge is largely attributed to most banks offering higher rates for the US dollar, aiming to enhance foreign currency collection. Both banks and the government are incentivizing remittance transfers through official channels by providing a 2.5 percent incentive from their own funds, entitling beneficiaries to Tk 114.75 per USD. Additionally, BAFEDA and ABB have recently reduced the USD rate, aiming to encourage expatriates to repatriate funds previously held in anticipation of a further rise in value. Emmanuel Huq, the managing director and CEO of Dhaka Bank, highlights heightened efforts by banks to collect remittances amidst the ongoing forex crisis.
Summary
Bangladesh’s meticulous approach to managing foreign reserves involves cultivating strategic partnerships and securing financial support from international institutions. The recent infusion of funds, which includes contributions from the IMF, ADB, a South Korean fund, and various donor agencies, highlights the nation’s unwavering commitment to strengthening its reserves. Remittances, a pivotal component, have experienced a noteworthy increase, reflecting positive dynamics in exchange rates. The government’s carefully calibrated monetary policy and flexibility in exchange rates have played a crucial role in positioning the country with a robust financial standing, successfully navigating challenges and laying the foundation for sustained economic stability. Nonetheless, challenges persist, emphasizing the ongoing need to concentrate efforts on enhancing export income and bolstering remittance flow to safeguard future reserves.
