Bangladesh faces tremendous challenges on fiscal management, especially from revenues generated from import activities
The forex reserve of Bangladesh bank exceeded $42 billion and continues to maintain its upward trend. The pandemic has not affected Bangladesh in terms of the forex build-up. It has grown even during the sub-prime crisis period when Bangladesh outperformed many of the competing nations.
Remittances, the largest net inflow of forex source, showed an upward trend even during the pre-pandemic period because of a 2% extra cash incentive offered by the government. During the past year, the country has witnessed 43% remittance growth, outperforming overall 26% forex growth. This growth, apart from the cash incentive, has primarily been achieved through the policy support of Bangladesh Bank.
Resilient Bangladeshi entrepreneurs helped maintain almost similar export numbers to the last year; just a 1% decline. Relatively shorter duration of lockdown in Bangladesh helped maintain its domestic consumption pattern.
The contraction of imports by almost 13% has dampened the demand for dollars, which have boosted the forex liquidity in the market. Because of travel restrictions, payments usually made for education, medical, pilgrimage and airlines have also gone down substantially.
Because of the drop in international price, the payments on crude and LNG alone is saving at least around USD 250 million per month. In addition, the domestic agricultural support has not forced Bangladesh to go for an extraordinary level of agricultural imports.
Overall current account balance, far exceeding capital account balance, contributed significantly towards the positive forex reserve in 2020. Boosting the formal channel of remittance and deferred payments for foreign payment obligations including debt servicing, reduced by 15%, has contributed to forex reserve build-up.
Not all the events listed above are permanent or pre-planned in nature. There is the issue of prudence required by the central bank to maintain this comfortable reserve. Then comes the question of whether USD 42 billion (12% of the economy) is sufficient for the country or not?
In comparison, India, now holding over $500 billion in reserve, grew from a mere $5.5 billion in just over 20 years and its foreign exchange reserves to GDP ratio is around 15 per cent.
While India's surplus is primarily driven by capital account surplus, Bangladesh has ridden its peak mostly based on current account surplus. Our present forex reserve is enough to meet our eight months' requirements for goods and services. Questions remain whether this is sufficient. There is no yardstick as such to measure this, apart from a typical benchmark of three month import size, and every country will have to look at its own shock absorbing ability and economic dynamics.
It is tempting to suggest the use of this forex reserve in investment opportunities available in Bangladesh, especially in ongoing and upcoming infrastructure project financing.
Some argue that greater weightage should be given to the return on forex assets based on direct as well as indirect costs and benefits of the level of forex reserves and possibly investing in some defined thrust sector, than simply maintaining the liquidity. This sounds popular and naïve, as such an unmeasured approach may be counterproductive and significantly damage the country's currency stability.
The current return on our forex reserves kept with different foreign portfolio managers and with other foreign central banks and commercial banks is negligible. It has already experienced a sharp fall in return on forex investment with LIBOR rate hovering around 0.23% and anticipated to remain below one per cent or even negative for a foreseeable future.
However, the expected volatility, as well as macro-economic policy, financial stability and fiscal or quasi-fiscal impact, should also be taken into consideration. Bangladesh faces tremendous challenges on fiscal management, especially from revenues generated from import activities. External factors are the only favourable temporary conditions that are giving the government breathing space, which is reflected in the forex reserve.
As we all know some of these reserves are not created entirely out of current account surpluses, rather generated from temporary deferral of some debt obligations, creating ease off, and these reserves will deplete once the regular payment cycle starts to kick off.
With all probability, given the nature of our economic affairs, the economy will again move towards its usual pattern unless a drastic shift of international trade portfolio of Bangladesh realigns to import substitute production economy.
Our future with our forex reserve
Most of our forex, with the exception of some gold reserves, are invested in US Treasuries and bonds of some advanced economies. Most of such returns have touched zero or even negative returns.
The Bangladesh Bank will eventually have to decide what to do with this excess reserve liquidity, in excess of its eight months forex obligations. The demand for dollars will continue to ease off on the backdrop of further quantitative relaxation in the US economy. This condition is going to go on for some time in the foreseeable future, at least during 2021.
Therefore, Bangladesh Bank will have to look for strategic decisions about maintaining its reserve as well as holding its real value. Investment in non-liquid assets are also volatile to a large extent, and to some degree, demand for gold will be on the rise for some time.
Opportunity in international volatility
The unanticipated sudden volatility for a safer and better yield for many countries may cause erratic forex inflow into countries like Bangladesh. Bangladesh should be vigilant towards investment to embrace the upcoming possible opportunities of capital shifting to emerging countries like Bangladesh.
To address the infrastructure deficiencies, the Seventh Five-Year Plan, FY2016–FY2020 required a total financing equivalent of around Tk31.9 trillion, which is almost twice the size of Bangladesh's GDP. The government lacks the fiscal resources to finance the country's infrastructure development on its own. It is almost certain that Bangladesh will be encountering many potential investment offers in our large infrastructure. The investment landscape, like well-developed economic zones, energy security, faster communication, regional connectivity, high end technological communication, and skilled work force are all at various phases of readiness. BIDA, EZ and the BB should sketch a strategy to remain vigilant, proactive and remain responsive to such opportunities.
Likely monetary policy for 2021
Any attempt to forcefully devalue the BDT momentum will destabilize the economic market force and can be significantly counterproductive. One should also understand that the forex is purchased by the central bank against release of domestic currency. The release of forex will have an impact on BDT already injected and can create impact on local currency liquidity.
The pressure group for currency devaluation and domestic utilization of forex needs will continue to pressurize. The beginning of deferred repayments, uncertainty of global demand for our exports, policy of classification of loans by central banks, real picture of loan repayment ability of the business houses in Bangladesh, global financial uncertainty and economic recovery potentiality of the post vaccination era, fiscal challenges impacting domestic borrowing by the government, timing of export realization to its regular levels, uncertain capital flights around the globe, world trade balances emerging during Biden era etc., will all make the year 2021 very interesting and challenging for Bangladesh. Monetary policy will continue to remain mostly unchanged till mid-2021 with a cautious approach and continuous cash supply, as well as stable and unlikely depreciation of BDT anytime soon in 2021.
Al Maruf Khan FCA (England & Wales) is an economic analyst, a practicing Chartered Accountant and former President of Chittagong Stock Exchange. The views expressed here are his own. Mr Khan may be reached at [email protected]