Forex reserve $7b short of IMF target

Infograph: TBS

The Bangladesh Bank is $7 billion short of the $25.3 billion net reserve target set by the International Monetary Fund (IMF) for September – a performance criteria that must be met to get the second tranche of the $4.7 billion loan package.

As the central bank is far behind the target, the IMF may revise the condition for maintaining reserves, according to central bank sources.

In a meeting with the Bangladesh Bank last week, a visiting IMF mission presented a macroeconomic performance review that noted that the country's net reserves were slightly below $18 billion at the end of September.

The Bangladesh Bank does not publish its net reserves, but only reports them to the IMF as required by its loan agreement.

The net reserve is still enough to cover more than three months of imports, which is more than what the global standard requires.

The gross reserve, which the central bank publishes on a weekly basis, stood at $21 billion on 4 October.

However, it is unclear whether the IMF will release the second loan instalment on time, given that the Bangladesh Bank missed the reserve target.

Crisis-hit Sri Lanka has already experienced a delay in the release of the second tranche of an IMF bailout after failing to meet several loan conditions.

The South Asian island nation hoped to receive the second $330 million tranche of its $2.9 billion four-year IMF bailout in September, seven months after the agreement had been reached.

However, the country failed to secure the second instalment after the first review of the IMF loan programme, which raised concerns among Bangladesh Bank officials.

Bangladesh Bank Governor Abdur Rouf Talukder and Chief Economist Dr Habibur Rahman are currently attending the annual meetings of the World Bank Group and the IMF in Morocco, where they will meet with top IMF managers to pursue the release of the second tranche, according to a senior executive of the central bank.

The Bangladesh Bank will try to convince the IMF that the reserve target set in February was ambitious, given the current economic reality, he said.

In February, when the IMF approved the loan package, the Bangladesh Bank's net reserves were $3 billion short of the $24.46 billion target set for June.

The net reserve was over $20 billion in February, but it has been falling steadily since then, reaching below $18 billion in September.

The net reserve target was ambitious given that the country's financial account was already in a deficit of $1 billion in July-December of FY23.

According to the IMF country report on loan approval for Bangladesh, the Bangladesh Bank has committed to improving its net reserve to four months of prospective imports by FY26 through prudent aggregate demand management policies, increased exchange rate flexibility, and structural reforms to bolster competitiveness.

The central bank also committed to phasing out foreign currency lending from the export development fund (EDF) built from the forex reserve.

The Bangladesh Bank has already reduced the size of the EDF from $7 billion to $3.7 billion and is phasing it out by introducing funds in local currency for exporters. This is in line with its commitment to the IMF.

Exports and remittances surpassed imports in the months after IMF loan approval, as monthly imports fell from $7 billion in the previous year to $5 billion.

In July-August of the current fiscal year, exports and remittances totalled $12.4 billion which was a $2.6 billion surplus of imports of $9.8 billion in the same period, according to central bank data.

Despite the surplus in primary income, the Bangladesh Bank could not rebuild its reserve as the financial account deficit kept widening.

The financial account deficit doubled to $2 billion in July-August of the current fiscal year after the IMF approved the loan package.

A country makes its foreign payments from the current account balance. If the current account balance becomes negative, it makes payment from the financial account and if this account also becomes negative, then the forex reserve becomes the last option for payment.

The four major components of a current account are goods, services, income, and current transfers.

On the other hand, a financial account is a component of a country's balance of payments that covers claims on or liabilities to nonresidents concerning financial assets. Financial account components include direct investment, portfolio investment, and reserve assets.

Negative growth in foreign loan inflow amid rising fund costs in the global market hit Bangladesh's financial account hard. Moreover, foreign investment slowed down amid uncertainty ahead of the national election and high volatility in dollar price kept portfolio investors away from fresh investment contributions to widen the financial account deficit.

Moreover, the fixed exchange rate regime compelled the central bank to keep selling dollars from the forex reserves.

The Bangladesh Bank sold $13 billion from the reserve in the last fiscal year and in the first three months of the current fiscal year, it sold $3.7 billion.

The latest figure shows that the central bank has been selling more than $1 billion from its reserves every month, causing a rapid erosion of its reserve position.