Rising imports leave little room to use reserves for dev projects

The government's plan to use foreign exchange reserves to bankroll infrastructure projects may face difficulty in the current fiscal year as rising imports will leave little leeway for making such lending.   

If the monthly import expenditure of January is taken into consideration, Bangladesh now has foreign exchange reserves that can cover import expenditures for 5.94 months, below the comfortable level of six months.

The reserves, aided by robust remittance and lower imports, stood at $44.04 billion on February 28 before coming down to $42.98 billion on March 10, according to the latest data of the Bangladesh Bank.

Import payments were $7.23 billion in January, up 35.64 per cent year-on-year.

The overall import declined by 0.23 per cent from July to January. It, however, has been rising since January because of the recovery of the economy from the pandemic-induced slowdown.

On March 15, the government, for the first time, took a move to lend money from the forex reserves for a development project. It sanctioned a loan of 525 million Euros, or Tk 5,417 crore, from the reserves for the dredging of a channel for Payra Port, a seaport in Kalapara, Patuakhali.

The government has formed the Bangladesh Infrastructure Development Fund (BIDF) to lend money from the reserves.

According to finance ministry documents, two conditions have to be met before lending from the fund are: the annual investment target from the fund would be no more than $2 billion, and the lending needs to be done after keeping the reserves for at least six months of import expenses.

Import expenditure may rise in the future as the economy is making a turnaround.

According to the letter of credit (LC) settlement data of the BB, the import of consumer goods rose 12.48 per cent from July to December. The LC opening such goods increased 4.58 per cent.

The LC opening to buy raw materials from international markets was up 1.71 per cent during the six months. The LC settlement for capital machinery declined.

The import of food grains has gone up since January.

A total of 5 lakh tonnes of rice were imported from July to March 15. It was 4,180 tonnes in the whole fiscal year of 2019-20.

The government imported 1.42 lakh tonnes of rice out of 5 lakh tonnes that entered the country so far in the current fiscal year. And most of the imports took place in the last two and a half months.

The government has also initiated the process to import another 13 lakh tonnes of rice to keep the supply smooth and avoid price volatility.

Because of the plan of buying a massive quantity of food grains from external sources, the import would get momentum in the coming months.

The uptick in imports came after global economic prospects improved markedly in recent weeks, on the back of ongoing mass vaccination against the deadly coronavirus across the world.

"Implementation of the policy decision to use forex reserves exceeding six months equivalent to imports for infrastructure investment depends on how the Bangladesh Bank assesses the monthly import requirements going forward and how actual reserves evolve," said Zahid Hussain, a former lead economist of the World Bank's Dhaka office.

Import payments have been relatively low in the past couple of years due to weak domestic demand. International commodity prices were either stable or declining, depending on specific commodities. The pandemic had exacerbated these pre-existing trends.

"A sharp pick-up in import payments to more than $7.2 billion in January is a good reminder that this can't be taken for granted," Hussain said.   

International commodity prices have risen, and domestic demand is poised to recover with the global vaccination and growing virus fatigue.

Advanced economies are projected to recover strongly in the second half of 2021 as their vaccination rates approach herd immunity. International commodity prices may thus rise further or remain at the current elevated levels, according to Hussain.

If imports remained at about $7 billion a month, there would hardly be any excess reserves left since it had recently been varying between $42 billion and $43 billion, he said.

Remittance growth has slowed, and exports are struggling to return to pre-pandemic levels, said the economist, adding that global recovery may boost both, but there is no certainty about how much and when.     

Adequacy of reserves is a major confidence anchor for foreign investors and creditors. It allows the Bangladesh Bank to smoothen exchange rate volatility, which is critical for macroeconomic stability.

"We hope the Bangladesh Bank will err on the side of caution in determining the adequacy of reserves."

Self-reliance in managing external stability risk is more important than self-reliance in financing infrastructure, said the economist.