Bangladesh looks for ways to rescue fast-depleting forex reserves

Economists think Bangladesh receive more remittances through illegal channels than the amount being lost from the reserves

After more than a decade of growth, the shrinking of the foreign exchange pile has left Bangladesh searching for ways to halt the slide as measures to control imports are failing to return the desired results. And the Bangladesh Bank appears to be disregarding expert opinions aimed at resolving the crisis.

Foreign currency spending is higher than what the country earns through remittances or exports. Economists say government accounts show remittances could have offset the deficit.

But the money is arriving through Hundi, or illegal channels. It means the remittances are reaching the relatives of the expatriates, but not replenishing the forex reserves of the Bangladesh Bank.

Experts say Bangladesh plunged into this crisis because of the central bank’s attempts to artificially maintain the value of the taka against the dollar.

One of the conditions set by the IMF under a $4.7 billion loan programme is to keep uniform dollar rates based on the market, but the exchange rate never translated into market value.

The value of the taka fell by about 20 percent in phases over the past year and a half. But the rate offered by the banks still has a 7-8 percent difference with the open market. The government provides a 2.5 percent incentive of remittances arriving through official channels.

bdnews24.com spoke to a former governor of the central bank, a former official of the IMF, a former official of the World Bank’s Bangladesh office and the chairman of a state-owned bank to understand what the country can do to improve the situation.

All of them said the Bangladesh Bank was not following basic rules to end the crisis, leading the dollar reserves to fall.

THE DEFICIT

In 2021, Bangladesh’s reserves stood at $48 billion and the government was keen on making it $50 billion. But after the economic activities stabilised following the decline of the pandemic, a spike in fuel, food and transport costs in the international market raised expenditures by several notches.

As the government turned to reserves, the world was hit by Russia’s invasion of Ukraine, further raising the fuel and food prices in the international market. This deepened the economic woes of developing countries like Bangladesh.

In a bid to control inflation, the United States raised interest rates and the dollar became a valuable asset.

Two years on, Bangladesh’s reserves fell by about $22 billion to $26.68 billion as of Tuesday. In line with the IMF’s BPM6 method, the gross reserves fell below $21 billion.

This accounts for a loss of $1 billion per month as the central bank has continued to sell $30-35 million per day to meet the demands of the commercial banks.

To reverse the current downturn of the dollar reserves, Bangladesh needs to earn more than a billion dollars on top of the regular earnings per month.

Bangladesh began discussion with the IMF over loans when the reserves fell to around $40 billion and the loan was sanctioned very fast as the IMF ensured Bangladesh of $4.7 billion in loans. The IMF released $476.2 million in February as first instalment and the second instalment is due at the end of October.

However, the IMF’s conditions were not all met. For example, Bangladesh was supposed to acquire a net reserve of $24.46 billion by September. But on Sept 27 it stood at $21 billion. Revenue collection did not see improvement either, though it does not involve the central bank.

However, several matters like reducing loan defaulting and implementing the official exchange rate in the market are in the hands of the Bangladesh Bank.

A representative team from the IMF is still in Bangladesh. They sat with the central bank on Oct 6 in a meeting as the Bangladesh Bank explained to them the situation of the reserves. Another meeting was held on Thursday and the IMF agreed to release the second tranche of the loan.

Ahsan H Mansur, the executive director of private research agency Policy Research Institute and a former official of the IMF, said: “If the review [IMF] mission sees their conditions have not been met, they might add new conditions. The IMF might also extend the time for releasing the next instalment of the loan.”

REMITTANCES

Apart from export earning and remittances, foreign loans and grants play a big role in the dollar reserves of the country. But due to the devaluation of the taka over the past two years, foreign loans, for private sectors in particular, have decreased in value while the amount of repayment has ballooned.

Bangladesh has also begun to pay back loans taken for development projects, further accumulating pressure in this time of crisis.

However, the uplifting prospect is that export earnings are swelling amid these challenges. Bangladesh earned $4.3 billion in exports in September -- a 10 percent increase year-on-year. The first quarter of this fiscal year also saw a growth of 10 percent year-on-year rise with over $13 billion in export earnings.

If the current trend continues, Bangladesh should be able to reach the export target of $62 billion this financial year. In FY23, exports stood at $55.56 billion.

But Bangladesh suffered a huge blow to inward remittances.

In August this year, remittances fell to $1.6 billion from $2.04 billion the previous year -- a 21 percent year-on-year decline. In September, it fell further to $1.34 billion, which is a 41-month low and 13 percent fall year-on-year.

In the meantime, reports citing central bank sources mentioned that the Bangladesh Bank approved the banks to collect remittances at an extra price, though the central bank gave no official words about it. However, the “concession” has apparently boosted remittances in October, according to reports.

In the first 13 days of October, Bangladesh racked up remittances of $800 million and if the trend continues through the month it might rise around $2 billion.

CLOSING THE GAP

Economists think remittances from expatriates through unofficial channels or Hundi have exceeded the spendings from the reserves. To justify this, they took into the difference between exchange rates of dollars arriving through the official and unofficial channels.

In July 2002, the difference between the fixed and the open market rates was 2 percent. But after imposing an LC margin of 100 percent, the difference leapt to 12 percent within a month.

Analysis shows that the rise of 1 percent difference of exchange rates between the fixed and open market rates sends 3.6 percent of the remittances from official channels to Hundis.

The price of the dollar was Tk 85.2 in 2021. Now it has risen to Tk 112 for each dollar with it being sold at Tk 120 in the open market. So the difference is about 8 percent.

In August 2022, Finance Minister AHM Mustafa Kamal said: “I conducted a study a long time ago when I was in planning [ministry]. I saw at that time that 51 percent of the remittances arrive through official channels… I think the trend has continued.”

An International Labour Organization study found Bangladeshi expatriates sent $1.44 billion back to the country per month in the 2012-13 financial year. According to the ILO’s calculation, another $4.3-$5.7 billion came in through illegal means.

Zahid Hussain, a former lead economist of the World Bank’s Dhaka office, said an extra $1 billion might come in through remittances.

“The Bangladesh Bank used to set dollar exchange rate as needed and the difference with the open market was not so huge before. The difference has climbed to Tk 9 now. And whenever the difference increased, the remittances were the lowest.”

Expatriates lean towards Hundi when the price difference is higher, he said. “They’d not want to take risks if the difference is low. It would also minimise money laundering.”

Zaid Bakht, the chairman of state-owned Agrani Bank, thinks this is where the solution lies.

He said strategies to control imports hinder the natural flow of the economy. “Supplies have to be increased to boost the reserves. Remittances must be increased. Administrative steps have to be taken to stop Hundis. Pakistan, which is behind us in almost all indices, was able to maintain stable remittance inflow this way.”

Strict steps are needed to stop Hundis and money laundering, said Salehuddin, a former governor of the Bangladesh Bank. “The Bangladesh Bank must ensure expatriates that remittances can be sent through banking channels at reasonable prices. Bangladesh Bank needs to employ all the tools at its disposal.”

He also pointed out that the economy was subject to “uncertainty” with the general election coming.

HOW CAN HUNDI BE STOPPED

Zaid Bakht said: “It’s easy to stop Hundi. Remittances don’t go to all the districts. Checking the MFS [mobile financial services] accounts of people in districts where more money pours in can point to Hundi. Bangladesh Bank can work on the data to shut them down.”

“Although the expatriates are not sending dollars, their families are still receiving money. They are getting it through mobile accounts or the banks. The Bangladesh Bank can assess this information. Only then could it be controlled.”

A joint taskforce comprising representatives of the Bangladesh Financial Intelligence Unit, law enforcers and different ministries is at work to stop Hundi.

The central bank restricted imports and took steps to stop money laundering, starting in July 2022. But the measures have not seen apparent success.

EXCHANGE RATE

The Bangladesh Bank was following a managed floating exchange rate model to set the dollar exchange rate from May 2003.

The difference between dollar rates for importers and exporters was Tk 1 at the time. The Bangladesh Bank sold dollars from reserves at the same rate as well.

But since September last year, the Association of Bankers, Bangladesh and Bangladesh Foreign Exchange Dealers’ Association have been setting the dollar exchange rate without any reference once a month.

The price of dollars at banking channels, including all sorts of export proceeds, remittances and inter-bank transactions, was last set at Tk 110.

Meanwhile, the exchange rate for selling dollars (import, inter-bank and sending money abroad) was set at Tk 110.5 and it has been effective since Sept 25.

Economist Zahid Hussain said: “With the exchange rates being set administratively, the currency market is behaving like the stock market. This has never happened before.”

On the frequent change of exchange rates by ABB and BAFEDA, Salehuddin said: “Expatriates won’t choose banking channels to send money if the exchange rate is so unstable. Foreign investors will be wary of it too.”

Following the meeting with the team from IMF on Oct 6, Bangladesh Bank spokesperson and Executive Director Mezbaul Haque said: “We’ve told them the reasons for why some of the loan conditions were not met and what steps we’d taken.”

On what conditions were not fulfilled, he said: “The reserves were not as stable as desired and the matter of tax collection.”

He declined to comment on making the exchange rate market-based.

[Writing in English by Syed Mahmud Onindo; editing by Osham-ul-Sufian Talukder]