Daffodil International University

Faculties and Departments => Business & Entrepreneurship => Topic started by: Rozina Akter on March 27, 2014, 12:22:48 PM

Title: Making the best use of forex reserve
Post by: Rozina Akter on March 27, 2014, 12:22:48 PM
The foreign exchange (forex) reserve in Bangladesh reached US$ 19.2 billion in February last, thirty-six times the reserve in 1990 and twelve times the level in 2000. The government until late 1990s had been worried much over the then inadequate reserves against that required to pay import bills. Every government used to criticise its previous government for the low reserves. The blame went first to an autocrat in the early 1990s for a meagre US$ 520 million reserves in 1989-90. The BNP-led government blamed a democratic government in the early 2000s for letting the reserves slip to US$ 1307 million in the fiscal year 2000-01 from US$ 3070 million in 1994-95. Any fall in the reserves was viewed as a cause of concern for the central bank, as it caused problems with import payments. This was an issue often used as a tool to meet political ends. 

How far we were from a satisfactory level of forex reserves? The import coverage limit for any economy is equivalent to at least three months' import bills. However, any government may wish to hold a higher level of reserves for the sake of easy payment of import bills and consistency in debt servicing. Our country had an amount of reserves to meet only one and a half months' import bills in 1989-90. That was the period when this aid-dependent country had to meet many conditions of foreign donor agencies. However, our reserves increased to cover import payments for up to five months in 2009-10. The government then took a pride in it and allowed the reserve build-up to cross the US$ 19 billion. Now the question is: Is it still a matter of pride for the government?

The reserve build-up is the balance of accrued foreign payments and receipts. Our major payment items are import bills, payments for services and payments for primary incomes and debts. Meanwhile, the imports increased from 12.3 per cent to 28.4 per cent of gross domestic product (GDP) during the 1989-2013. In addition, the payment for incomes and services increased from 0.7 per cent and 3.2 per cent of GDP in 1999-2000 to 1.9 per cent and 4.7 per cent respectively in 2012-13. On the other hand, there was a satisfactory progress in export receipts from 5 per cent to 22 per cent of GDP during the 1989-2013 and the remittances increased from 2.5 per cent to 12.5 per cent during the period. A gradual accumulation of surpluses over payments led to a positive current account balance of US$ 2.5 billion or 2.1 per cent of GDP in 2012-13, which was at its peak at 3.7 per cent in 2009-10.

Our wage earners' remittances reached US$ 14.5 billion in 2012-13 growing at an exponential rate of 13 per cent since the early 1970s. It also contributed much to our national economy. It is reported that every 10 per cent increase in per capita remittance reduces poverty by 3.5 per cent. Moreover, the marginal inflow per worker was US$ 816 last year, which would push up the yearly inflow to US$ 20 billion in three years. Such a higher inflow has sufficiently met the demand for foreign currencies, reduced aid dependence and stabilised the forex market. This large sum of reserves has driven the government to shun the reserve build-up policy and move towards the surplus utilisation policy.

Meanwhile, a positive foreign account balance goes against the aid-dependent syndrome. There was a simultaneous rise in import payments and outstanding debts until the early 1990s, when the government had to control forex supply for its self-insurance. Moreover, it was necessary to comply with market-oriented reforms as stipulated by the World Bank and other international donor agencies. The government was so much obedient that it withdrew almost the entire subsidies on fertilisers in the mid 1990s. It was $83 million in 1979-80. However, it was re-introduced in 1997 as an option was there to keep agriculture in the Green Box of the World Trade Organisation (WTO). Such a reverse stand was possible partly due to a rise in exports and wage earners' remittances.

Our ready-made garment (RMG) sector and the wage earners' remittances contributed much to the high reserves. However, their markets could not be spatially diversified. It is widely acknowledged that the growth in the RMG sector was achieved by dint of cheap labour. But the workers are still deprived of the proper trickle-down benefit from the returns. What is added is the risk to their lives in the wake of the surge in incidents like fire and building collapse. On the other hand, the overseas labour market expanded with a hefty outflow of unskilled workers with only 3.7 per cent of them being professionals. They get cheated both home and abroad. The public initiatives other than currency devaluation were not so creditworthy to support the forex suppliers. However, the credit was claimed by the successive governments.

Now, there is little room for arguing on reserve build-ups because of the costs associated with high reserves. The central bank has to incur losses by buying a large amount of forex. Such an injection of money undermines the inflationary target under the monetary policy. Why will not our government move to undertake big infrastructure projects, a part of imports for which can be covered with our forex reserves?

Very recently, the Finance Minister hinted at using the central bank's reserves to finance the Padma bridge project. Moreover, the central bank is set to allow local corporate firms to invest abroad. The government seems to be active about utilisation of the forex reserves. In the process of public borrowing, a few infrastructure projects may come to the fore. However, this amount of reserve cannot be termed very high, if it starts to decline once. In this regards, the government needs to care for two giant sources like RMG export and workers' remittance. Not under pressure from external bodies, a safe, sound and secure workplace is necessary to make the industry sustainable. On the other hand, the labour market abroad is increasingly being grabbed by India, China, Korea and the Philippines, who are ahead of Bangladesh in technical and language skills. We are in need of political wisdom to reduce the irregularities resorted to by RMG and manpower exporters. We also need to address the lack of skills of the potential migrants and the barriers to export diversification. Moreover, an accurate forecast on forex inflow and well-drawn plan for its investment might help the country reap benefits from the forex reserves.

Writer: Dr. M Aminul Islam Akanda  Associate Professor and Chairman of the Department of Economics at Comilla University.      akanda_ai@hotmail.com
Title: Re: Making the best use of forex reserve
Post by: saimonh on June 07, 2014, 12:15:13 AM
Its definitely a positive sign of our economy that the reserve is increased a lot and continuously it is increasing.
But the question is, what should we do with the reserve?
Without the proper utilization of the reserve, it just all about wasting our time and money.

Title: Re: Making the best use of forex reserve
Post by: fatema nusrat chowdhury on July 23, 2014, 09:01:09 AM
thank you :). it is useful information
Title: Re: Making the best use of forex reserve
Post by: fatema nusrat chowdhury on August 14, 2014, 01:24:07 PM
Very informative post. Thank you for sharing