In an intriguing development within the span of a week, Bangladesh Bank has witnessed a notable increase in its foreign exchange reserves by approximately $320 million. After receiving the third loan installment from the International Monetary Fund (IMF), overall reserves crossed the critical $25 billion threshold.
The central bank’s recent disclosures highlight a subtle route of the reserves. As of June 12, preceding the festivities of Eid-ul-Adha, Bangladesh’s reserves were recorded at $24.52 billion. Remarkably, in a short period, this figure ascended by more than $260 million, reaching $24.78 billion by the subsequent Wednesday. Later, after receiving an IMF loan, the reserve stood at $26.5 billion on 27 June 2024.
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Moreover, IMF’s BPM6 methodology reveals an even more substantial uptick. At the outset of June, reserves calculated via BPM6 stood at $18.72 billion. This figure saw a steady increase to $19.2097 billion by mid-June, culminating at $19.5279 billion by the week’s end.
Reserves by Date (Standard Methodology)
- June 12, 2024: $24.52 billion
- June 19, 2024: $24.78 billion
- June 27, 2024: $26.5 billion
Reserves by Date (BPM6 Methodology)
- June 1, 2024: $18.72 billion
- June 19, 2024: $19.2097 billion
- June 27, 2024: $19.5279 billion
Tracing Bangladesh’s Reserve Fluctuations Over the Past Year
Reflecting on the preceding month, the total reserves were pegged at $25.37 billion. However, significant payments amounting to $1.63 billion to the Asian Clearing Union for import settlements resulted in a dip, bringing the reserves down to $23.90 billion by mid-May. Under the BPM6 framework, this translated to a reduction of $18.42 billion. Notwithstanding, the subsequent five-week period has evidenced a recovery, marking an overall increase in the reserves.
This trajectory underscores the dynamic nature of Bangladesh’s economic landscape, where fluctuations in foreign exchange reserves are influenced by various factors, including significant international payments and the country’s economic policies.
According to data from the Bangladesh Bank, on June 19th of last year, the country’s total reserves stood at $29.91 billion. Over a year, this figure has decreased by $5.13 billion. Amidst a dollar shortage and deficits in both financial and current accounts, Bangladesh sought a loan from the IMF in July 2022.
Key Changes
- June 12 to June 19 (Standard Methodology): +$260 million
- June 19 to June 27 (Standard Methodology): +$1.72 billion
- Total Increase (Standard Methodology): +$1.98 billion
- Total Increase (BPM6 Methodology): +$807.9 million
Six months later, on January 30th of the previous year, the IMF approved a loan of $4.7 billion. Bangladesh received the first installment of $476.3 million on February 2nd and the second installment of $681 million in December of last year. The third installment, amounting to $1.15 billion, was disbursed last Thursday, which bolstered the reserves further to $26.5 billion.
As of June 19th, the country’s gross reserves stood at $24.78 billion, according to the accounting method used. The BPM6 method, however, shows reserves at $19.52 billion. The government and Bangladesh Bank have attributed the unusual depletion of reserves to the Russia-Ukraine war and other international factors.
Bangladesh’s Reserves Face Steepest Decline Among Similar Economies, IMF Reports
IMF data indicates that among neighboring and similar economies, Bangladesh’s reserves have experienced the most significant decline. From April 2022 to April this year, the reserves have dropped by nearly 45%. In comparison, Thailand’s reserves decreased by 5%, and the Philippines’ by about 2%. Meanwhile, reserves in Indonesia and South Africa remained unchanged. Over the past two years, India’s reserves increased by 5% and Mexico’s by nearly 10%, with Brazil and Malaysia also seeing increases.
IMF Loan Details
- July 2022: Bangladesh sought a loan from the IMF.
- January 30, 2023: IMF approved a loan of $4.7 billion.
- February 2, 2023: First installment of $476.3 million received.
- December 2023: Second installment of $681 million received.
June 27, 2024: Third installment of $1.15 billion received.
To curb the depletion of reserves, Bangladesh has devalued its currency against the dollar at a record rate over the past two years. The exchange rate has risen from 84 taka per dollar to 118 taka, a devaluation of nearly 40%. IMF data shows that among similar economies, Bangladesh’s currency has depreciated the most over the past two years. From April 2022 to April this year, the Indian rupee depreciated by about 10%, while the Malaysian ringgit, Indonesian rupiah, Thai baht, Brazilian real, and Philippine peso depreciated by approximately 12%. In stark contrast, Mexico’s local currency appreciated by over 15% against the dollar.
To ensure that the country’s foreign exchange reserves do not reach a precarious level, Bangladesh Bank has been implementing various measures over the past two years. One of the primary steps taken has been to control imports. Compared to the 2021-22 fiscal year, imports decreased by approximately $14 billion in the last fiscal year. This fiscal year, imports could potentially decrease by another $25 billion. Despite these measures, which cumulatively reduce imports by nearly $40 billion over two fiscal years, the impact on reserves remains minimal.
Reserve Strategy Falters Despite Currency Devaluation
Despite devaluing the taka by nearly 40% against the dollar and introducing a ‘crawling peg’ policy for exchange rate determination, Bangladesh Bank’s efforts have not stemmed the depletion of the country’s foreign exchange reserves. Additionally, mechanisms for currency swaps between banks and initiatives to ease the pressure on the dollar through transactions in rupees, yuan, and rubles were introduced. Even with a $4.7 billion loan agreement with the IMF, these measures have fallen short. At each step, the Bangladesh Bank asserted that these actions would halt reserve depletion and lead to an increase.
Reserve Changes (April 2022 to April 2023)
- Bangladesh: -45%
- Thailand: -5%
- Philippines: -2%
- Indonesia: 0%
- South Africa: 0%
- India: +5%
- Mexico: +10%
However, the continued erosion of reserves and persistent high inflation are consequences of delayed, inconsistent, and insincere policy implementation. The exchange rate should have been aligned with the market long ago. The delay has allowed a substantial illegal hundi market to flourish. Now, people seek hundi operators not only for cash dollars but also for import transactions. Additionally, capping loan interest rates has exacerbated inflation, and the delay in allowing market-determined interest rates has only made matters worse.
The gap between Bangladesh’s gross foreign exchange reserves and net reserves is widening. According to IMF, Bangladesh’s net reserves stood at $12.8 billion at the end of April this year. In contrast, Bangladesh Bank reported gross reserves of $25.37 billion on the same day. This indicates a disparity of $12.57 billion or 50.45% between the gross and net reserves.
From $48 Billion High to Current Low
The report highlighted that in June 2022, Bangladesh’s net reserves were $28.4 billion, sufficient to cover 4.2 months of imports. Since then, the decline in net reserves has weakened the country’s import capacity. By the end of the current fiscal year 2023-24, net reserves are projected to drop to $14.78 billion. A country is considered to be in a safe zone if its reserves can cover at least three months of imports. However, the current reserves can only cover 1.8 months of imports.
The IMF report further noted that Bangladesh has failed to maintain the required reserves as per the loan agreement conditions. Nonetheless, the IMF acknowledged Bangladesh Bank’s bold decision to adjust the exchange rate against the dollar and approved the third installment of the loan based on the commitment to take necessary corrective measures.
Currency Depreciation (April 2022 to April 2023)
- Bangladesh (Taka): -40% (84 to 118 per dollar)
- India (Rupee): -10%
- Malaysia (Ringgit): -12%
- Indonesia (Rupiah): -12%
- Thailand (Baht): -12%
- Brazil (Real): -12%
- Philippines (Peso): -12%
- Mexico (Peso): +15%
According to the loan agreement, Bangladesh was required to maintain net reserves of $17.78 billion by last December. However, the country managed to hold $16.72 billion. Since then, net reserves have further declined. In response, the IMF has relaxed the reserve requirement, setting a target of $14.78 billion by June. In August 2021, Bangladesh’s reserves reached an all-time high of $48 billion. Since then, there has been a continuous decline.
