The International Monetary Fund has raised questions about the adequacy of Bangladesh's foreign currency reserves, now more than $32 billion, at a time when the government seems rather satisfied with the sum.

The amount is enough to foot 8.95 months' import bill of Bangladesh, but given the country's slow export growth and decline in remittance inflows, the safe reserve limit should be equal to 9.6 months' import bill, the IMF said last week.

In the first ten months of the fiscal year, the average monthly import bill was $3.62 billion.

“Benchmarking adequate level of reserves is central to designing policies that preserve the country's resilience to external shocks, particularly given Bangladesh's limited access to capital markets,” the IMF said in the report.

A $10-billion sovereign wealth fund was in the works to channel the reserves to various infrastructure projects, and the cabinet even gave its nod to the proposal.

At such a time, the IMF has raised questions about the safe limit for Bangladesh's foreign currency reserve.

The IMF in its assessment last year had said a reserve level equivalent to 8.5 months' import bill was adequate.  But since then several macroeconomic developments have taken place that have changed the baseline scenario, including the current account on which the reserve adequacy assessment is based.

The current account has swung from a previously projected deficit of 1.3 percent of GDP in fiscal 2015-16 to a surplus 1.7 percent, mainly on subdued imports.

Exports are holding up, but remittances have slowed down, the IMF said. In fiscal 2015-16, remittances dropped to $15 billion (6.8 percent of GDP) from $15.25 billion (7.9 percent of GDP) in fiscal 2014-15.  Inflows are predicted to drop further by almost 17 percent in fiscal 2016-17.

“Reserves are expected to rise -- albeit at a more moderate pace than previously estimated -- underpinned by export earnings, FDI and external borrowing.”

It was assumed previously that reserves would register 8 percent average growth over the medium to long term. Reserves are now expected to grow at 5 percent on average.

Based on IMF methodology for low-income countries, reserves ranging from 3.1 (floating exchange rate) to 9.6 (fixed exchange rate) months of imports are assessed as adequate.

By law the exchange rate arrangement is classified as floating, but the central bank intervenes in the foreign exchange market to keep the exchange rate relatively stable against the US dollar.

“Therefore, with the de facto fixed exchange rate, a reserve coverage close to top end of the range would seem appropriate.”

Cross-country comparisons also suggest that the import coverage for Bangladesh is close to the average for low-income countries in the region but below emerging market economies.

The possible shocks to the current account include a further, more-than-projected slowdown in remittances and lower external demand for Bangladeshi exports.

“Prospects for remittances are subject to considerable uncertainty, as the recent decline has been particularly pronounced,” the IMF said.

Remittances continue to decline even though the number of Bangladeshi workers abroad has increased steadily in recent years.

In the first 11 months of fiscal 2016-17, a total of $11.5 billion of remittance was received, down 14.18 percent year-on-year, on the back of low oil prices and deepening conflicts in Gulf countries -- the largest source of overseas income.

About export prospects, the IMF said global growth is more subdued now than in the past. The US, Germany and the UK represent Bangladesh's three main export destinations. Thus, a risk of slowdown in the European Union may hurt exports.

“Additionally, as per media reports, British garment importers have started putting price pressures on exporters of Bangladesh following the announcement of Brexit.”

In the short-term the impact may not be a major concern but in the long term rising inflation expectations in the UK from the possible depreciation of the pound will affect exports.

General uncertainties over rising protectionist pressures will continue to shadow the outlook for Bangladesh exports, the IMF added.

Subsequently, reserve coverage is likely to decline from current levels.b