BB’s desperate erratic moves fail to stave off dwindling forex reserves
Special Report :
A rapid decline in remittance flows from migrant workers in recent months, by far the country’s primary source of forex earnings, has compelled Bangladesh’s Central Bank to increase the effective cash incentives provided by banks from 2.5% to 5% this week. This change will ensure migrant workers an effective exchange rate of 115.50 BDT:USD.
This new rate still is at a substantial discount to the market rate (hundi rate) of 120 BDT:USD. Central Banks primary concern of making inflation-which already stands over 9%-worse is justified in limiting BDT devaluation.
However, can the government afford this discounted official USD rate for long?
The BB has been vacillating in its strategy on whether to implement uniform single rate or multiple exchange rates for some time.
This is causing confusion in the local financial markets impeding standard operating procedures for opening and settling LCs for critical import items.
Few banks are currently offering Bangladesh Bank’s official rate when opening LCs as they are forced to acquire remittance dollars from migrant workers at higher rates.
A practice that was illegal in recent past but now promoted by the central bank.
With LC volumes drastically reduced, local industries have no choice but to accept these higher rates from LC opening banks.
Yet government agencies are making dollar indexed payments for services according to the official exchange rates.
Power Development Board for example is paying Independent Power Producers (IPPs) for fuel imports and capacity charges using the official exchange rate which still stands at 110.5 BDT:USD. However, these same power companies must import fuel and spares (some even must make foreign loan payments) at near-market rates through the banks.
Forex reserves which now stand at around USD 17 billion according to some estimates, would have been more than adequate in the past.
However, with nation’s foreign debt obligations well north of USD 135 billion, primarily driven by government spending on infrastructure, the country must manage its flow of USD carefully.
Bangladesh sells overseas mostly ultra-low value adding readymade garment products accounting for over 80% of total exports.
However, most of the raw materials for garment manufacturing including cotton, yarn (fraction of total consumed), chemicals, and accessories are imported.
With rapidly depleting reserves of gas, the country has shifted to expensive imported liquid fuel and LNG to generate power.
If locally produced gas and coal are priced at global market rates, the subsidy to export sectors will surely result in negative net foreign exchange flow from RMG and other low value-added industries.
What is being termed as development in Bangladesh is merely government spending in infrastructure.
Such investments in infrastructure using foreign loans are risky especially when these don’t generate earnings in foreign currency.
Tolls collected from bridges, elevated highways etc., generate cash in BDT not USD. These investments surely will someday contribute to forex earnings when export oriented industries emerge in remote areas that were not accessible in the past due to lack of infrastructure.
Installment payments for loans taken in foreign currency for infrastructure projects thus in the short-term have largely contributed to the forex crisis.
This growing foreign debt pile while still low considering the size of Bangladesh’s GDP, is a major concern when considering country’s forex earning capacity.
With ultra-low value adding RMG comprising of more than 80% of exports, the country must rely on remittances sent by its 15-20 million legal and illegal unskilled migrant workers around the planet to pay for imports and service our foreign debt.
To make matters worse, a sharp decline in imports which is hovering around USD 4.6 billion in September from around USD 6.06 billion same time last year is choking domestic production: driving inflation to over 9% annually.
Against the backdrop of substantial reduction in remittances (through formal channels), exports and imports, its mind boggling how the country’s GDP is forecast to grow at a 6% pace (fiscal 23-24) according to IMF.
Just like the forex reserve stats from a year back, our export numbers are expected to make a “reality adjustment” soon.
Already there is talk about double counting in our export stats and over invoicing driven by export incentives.
Unless there are steps taken to have one market aligned exchange rate for the USD and simultaneous imposition of complete ban on hundi trade especially before elections, government will cause irreversible damage to the economy.
Pakistan, for example, has made substantial improvements in remittance flows through formal channels by going after hundi trade.
Furthermore, subsidized electricity and gas prices are effectively allowing export industries dump products globally at below actual cost.
This practice is promoting inefficiency and draining our forex reserves through higher and costly import of liquid fuel, coal, and LNG. Bangladesh thus must put an end to subsidized exports to reduce drainage of forex.