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Bangladesh’s capacity to pay import bills has deteriorated at an alarming rate amid the fall of the country’s foreign exchange reserve in recent months against an unusual surge in imports.
The country’s foreign exchange reserve exceeded $48 billion in August 2021, but the treasure dipped by nearly $4 billion to $44.05 billion on April 13, 2021.
With the reserve in August 2021, Bangladesh was capable of paying import bills for 8.39 months, but the drop in reserve worsened the country’s capacity in recent months.
Bangladesh Bank data showed that the country in February this year was capable of paying import bills for 6.44 months when its foreign exchange reserve was $45.95 billion.
The central bank is yet to disclose how many months’ import bills can be paid with the current reserve.
The country was capable of clearing import bills for 9.35 months with its reserve in January 2021.
The payment capacity was determined based on reserve in a particular month against the average import costs of the preceding 12-month.
Even before the outbreak of the Covid-19 pandemic, the country was capable of meeting import bills for 6.5 months with its reserve in December 2019.
Experts said that the country might face a crisis in terms of maintaining a comfortable amount of foreign exchange reserve if its import payments remained high in the coming days.
Former Bangladesh Bank governor Salehuddin Ahmed said a sharp increase in import payment made the foreign exchange reserve decline.
‘We have to be cautious from now on,’ Salehuddin told New Age. ‘The country will face a tough time if our import payment capacity deteriorates to a level of just 3-4 months. Such a weakening situation may lead our economy to a state of Sri Lanka,’ he said.
‘We need to take cautionary measures to prevent an illogical increase in imports,’ he said, adding that the authorities should check why import payments increased unusually in the recent times and if there were any under-invoicing or over-invoicing.
Besides, the exports also need to be checked to see whether the export proceeds were being repatriated or not, he said.
Former World Bank Dhaka Office chief economist Zahid Hussain told New Age that it was time to take cautionary measures.
Trade deficit and current account deficit have already grown significantly mainly due to massive import growth, he said.
A possible economic slowdown in Europe may affect Bangladesh’s export, Zahid said, adding, ‘the existing Russian-Ukraine war may also affect our export market diversification in the European region.’
If such a situation takes place, the country’s deficit will widen further and the situation will become tough to manage, he said.
The policies should be adopted considering these factors, he said.
If our policy is still to keep dollar exchange at the present level or allow it to depreciate by only Tk 2 at most without considering the balance of payment situation and the BB continues to supply dollar from the reserve, the country will continue to lose its reserve and such an erosion of reserve will not be sustainable, the economist said.
Before we reach a situation like Sri Lanka, where there will be no option but to go for massive devaluation of local currency to tackle trade deficit it will very disruptive for the economy, he said adding that the exchange rate should be adjusted substantially otherwise reserve adequacy cannot be maintained.
If the devaluation of currency fuels inflation, fiscal measures can be adopted to tackle the situation, said Zahid.The gravity of the situation was also reflected in the Asian Development Bank’s latest report published in April, where the Manila-based lender projected that the country’s remittance fall and import growth may widen its current account deficit to 2.7 per cent of GDP in FY22 from 0.9 per cent of GDP in FY21.
Amid high spending on the US dollar and a decline in the country’s reserve earnings, the central bank asked banks to slap at least a 25 per cent commission on non-essential items.
The government also allowed unlimited investment in its US dollar premium bond and US dollar investment bond in April 2022 scrapping its previous investment limit of up to Tk 1 crore equivalent amounts in such investment tools.
Prime minister Sheikh Hasina earlier this month asked the authorities concerned to take measures so that Bangladesh could maintain its current position regarding foreign debt.
The central bank in another measure allowed devaluation of the exchange rate of the dollar with the exchange rate of the US dollar appreciating to Tk 86.2 in March 2022 from Tk 84.8 in August 2021.
On April 17, a high-powered government committee also discussed the high import and reserve erosion issue. The meeting, headed by finance minister AHM Mustafa Kamal, also suggested measures to be thrift in spending foreign exchange reserve.
Asked about import payment capacity deterioration, BB executive director and spokesperson Md Serajul Islam said that there was nothing to be worried about in the country’s reserve situation.
‘As per international standard, a country’s capacity to pay three months’ import bills is considered enough whereas our reserve is still enough to meet up more than six months’ import payments,’ the BB spokesperson told New Age.
The central bank also took an initiative to discourage the import of luxurious times to prevent foreign reserves spent in bulk amounts for this purpose, Serajul said.
The BB official also hoped that the country’s remittance earnings would increase further in the coming days.
The erosion in reserve happened at a time when the country’s external debt grew sharply in recent years.
At the end of December 2021, Bangladesh’s external debt reached $90.79 billion, including the government’s $67.72 billion and the private sector’s $23.08 billion, according to Bangladesh Bank statistics.
In FY11, the country’s external debt was $23.61 billion. In 10 years, the country’s foreign debt increased by 3.84 times.
The government for the fiscal year 2021-2022 set aside $2,090 million for its external debt servicing whereas the amount was $1,144 million in FY17.
Apart from the high import payments, the surge in external debt payments added more concern for the country.
In another concern for the economy, the country is also heading towards the highest-ever trade deficit in the current fiscal year 2021-2022.
In the first eight months, the country’s trade deficit reached 22.31 billion, almost an equal amount to the trade deficit in the entire FY21.
If the trade deficit growth rate remains unchanged in the remaining four months of FY22, the amount will reach around $33.5 billion, economists say.
In July-February of FY22, Bangladesh’s current account deficit reached $12.83 billion against $825 million in surpluses in the same period of the previous year.
The remittance earnings slid by 17.74 per cent and import spending grew by 46.7 per cent against an export growth of 29.8 per cent, according to the latest BB data.
BB data showed the country’s import spending skyrocketed to $54.38 billion from $17.31 billion in July-February of FY22, which was $37.07 billion in the same period of FY21.
Remittance dropped by 17.74 per cent or $3.3 billion year-on-year in the July-March period of FY22. In the first nine months of FY22, remittance declined to $15.3 billion from $ 18.6 billion in the same period of FY21.
(NA)
