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Bangladesh
Rejaul Karim Byron , Zina Tasreen
Thu May 12, 2022 08:00 AM
Last update on: Thu May 12, 2022 12:54 PM

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Bangladesh

Forex reserves under strain: Govt defers employees' foreign tours, less important projects

Rejaul Karim Byron , Zina Tasreen
Thu May 12, 2022 08:00 AM Last update on: Thu May 12, 2022 12:54 PM

The government finally raised its guard against the dwindling dollar reserves, putting its employees' foreign tours on hold and deferring projects that require much imports.

This comes a day after the central bank toughened its rules for luxury and non-essential imports like sports utility vehicles, washing machines, air conditioners and refrigerators.

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The twin moves are expected to safeguard the foreign currency reserves, which have come down to less than $42 billion -- enough to cover five months' imports.

"When times are tough, we have to take decisions that are tough too," Finance Minister AHM Mustafa Kamal told reporters after a meeting of the cabinet committee on public procurement yesterday.

The impacts of the Ukraine war, which has increased the prices of commodities in the global market, are being felt everywhere.

"We cannot say when the Ukraine war will end. Considering the global situation, we have taken this step. All this while, we were living in luxury. We can defer our luxury purchases for a month, two months or six months."

Projects that would not derail the strong economic growth momentum are being deferred, Kamal said.

"We are restructuring to effectively manage the situation. Through this, our economy will become more robust," he added.

Economists though said the government should have acted more proactively and taken the step as soon as the reserves began dipping.

After a pause in 2020 for the global coronavirus pandemic, imports started surging in 2021.

Exports were surging and remittance was gushing in, so reserves stayed at a healthy level, enough to give cover to six to eight months' import throughout last year.

The situation took a turn in January with the start of Russia's invasion of Ukraine. The reserves began to feel the pinch of the drop in remittance growth, which began in July last year, as well as the swelling import bill.

By February, the import cover came down to less than six months and has been getting worse since.

Meanwhile, the taka began depreciating and the central bank was selling dollars from the reserves to keep the exchange rate stable.

"This step was necessary and should have been taken much earlier," said Debapriya Bhattacharya, distinguished fellow of the Centre for Policy Dialogue.

For instance, Nepal imposed a ban on luxury and non-essential imports last month, when its import cover was for seven months.

The World Bank and the International Monetary Fund prescribe a reserve buffer of six months' import bill.

"I don't know how much success this piecemeal move will have in preserving the foreign currency reserves," Bhattacharya added.

Earlier on April 11, banks were instructed to impose a margin of at least 25 percent on the opening of letters of credit for non-essential consumer goods but to no avail.

The government should have acted decisively much before, said Zahid Hussain, a former lead economist of the WB's Dhaka office.

"I have been saying for a while that the government's foreign currency expenditure must be brought down promptly. If the import demand is not cut, the deficit in the current account that has been widening every month will not be brought down. These are the right steps."

Hussain went on to advise the central bank to exercise restraint in its currency sales.

"The reserves have now come at a stage that it is the bare minimum. Normally, six months' import cover is sufficient but given the global inflation, eight to nine months' cover would be safe."

The exchange rate adjustment must be allowed to depreciate more.

"It will have an impact on remittance and import -- it will help both ways."

The inflation will increase but that is necessary.

"Those who will be impacted by the rising prices should be given a helping hand through the budget as not everyone will be impacted. Monetary policy cannot help them much."

Related topic:
forex reservesforeign currency reservesFinance Minister AHM Mustafa KamalForex Reserves Bangladesh
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