What happened if foreign currency reserve goes empty?

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What happened if foreign currency reserve goes empty?

News Analysis by Md Jasim Uddin Khan

I am not a macro economic analysts, rather I am a general citizen who needs buy baby foods , consume wheat, edible oil, toiletries and fruits mostly either those raw materials or finished form come from abroad. Prices of those rose many fold during last couple of years. A perception among the general people is that a limited group of Bangladeshis close with the power have smuggled out trillions of dollar from the country in the name of development activities. Now I am concern that those essential commodities are going beyond our reach due to the price escalation. This simple indication raises my concern when I found that economist are sensing a situation that those are happening for dollar crisis and it will worsen further. Now a question arise in my mind that if the foreign exchange reserve come into empty what happen to the consumers like me. Actually economist says country like Bangladesh who’s economy is heavily reliant on remittance and export earning will never face a situation that its dollar stock go zero. But if the situation worsens the country’s economy may face sever turmoil.

Bangladesh’s foreign exchange reserves ticking  to  US $20.0 billion recently fearing that it can go down further. The Asian Clearing Union (ACU) dues for the months of September and October have to be paid in early November. Then the reserves could fall further.

Presently, the usual monthly import expenditure is $6 billion. As per the present trends, $18 billion will be needed to meet three months of import demand. Import expenses of little over three months can be met under the Bangladesh Bank policy of a controlled spending system. A further reduction in imports will cover four months of import expenses.

The situation would not improve before the next national election as there is uncertainty. Economist suggested that If a stable government is formed through a credible election, then the economy will recover fast due to improved confidence level.

In Bangladesh, Foreign Exchange Reserves are the foreign assets held or controlled by the country central bank. The reserves are made of gold or a specific currency. They can also be special drawing rights and marketable securities denominated in foreign currencies like treasury bills, government bonds, corporate bonds and equities and foreign currency loans.

It is irreversible to find a solid way-out, such as diversifying energy sourcing, enhance energy production domestically, and exploring alternative payment arrangements.

Bangladesh, will not able to pay its fuel imports dues timely if the situation worsen. The scarcity will led to a dire situation for the country’s energy sector and its overall economic stability.

Bangladesh Petroleum Corp (BPC), owing over $300 million and experiencing an alarming decrease in fuel reserves. It is made challenging for BPC to pay for imports on time, leading to disruptions in fuel supply throughout the country. The fuel shortage has resulted in power cuts that have severely affected Bangladesh’s exports-oriented garments industry. The fuel scarcity poses a significant threat to the textile and other export sectors competitiveness and could result in reduced exports and job losses. Importers are struggling to make timely payments, leading to disruptions in the supply chain and increased uncertainty. Commercial banks, unable to meet import payment obligations, face liquidity constraints and potential financial strain.

Why dollar crisis worsen:

  1. Depressed dollar value: Both the central bank and ministry of finance kept dollar’s value forcibly depressed which accelerate crisis. The recent foreign currency reserve situation is nothing but the results of wrong policies by the concern authority. Thus, BB got enough signals to correct the exchange rate by devaluing the taka, but it didn’t.
  2. Import dominance: Remittances and exports performed worse than imports. current account balance, which has been doing good for over 14 years since the early 2000s, started declining since FY2016. Forex reserves started falling for three years since 2016.
  3. Money Laundering: lack of proper supervision and monitoring a good numbers of businessmen, civil and military bureaucrats and politicians laundered trillions of dollar abroad sensing uncertainty of protecting their income. A few years ago World Bank estimates that Illicit financial transfers amounting to almost USD 8 billion per year. It is very easy transferring money by exporters and importers using under-invoicing and over- invoicing.
  4. Deferred Payment: foreign investors have taken away their profit earned against their investment like energy, telecom and other sectors.
  5. Inflation indication: finance minister prediction proved wrong that that capital flight will get reversed just because foreign inflation is high. Foreign inflation figures, such as US inflation of 8.5 percent, may look higher than Bangladesh’s 6 percent – but Bangladesh Bureau of Statistics (BBS) figures are particularly inaccurate for inflation and unemployment.

 

What shall to do:

Economic Reforms: Governments should go for a economic reforms to address the root causes of the crisis. This could involve measures to control inflation, reduce trade imbalances, attract foreign investment, and improve the overall economic environment.

Monetary and Fiscal Policies: the Bangladesh Bank can reverse the monetary policies to stabilize the currency and control inflation. Governments might also implement fiscal policies to manage deficits and debt levels.

Structural Reforms: Structural reforms aiming to competitiveness of the economy, including regulatory measures and investment in key sectors, can help restore market confidence and attract FDI.

External Assistance: International financial institutions and other countries might offer assistance in the form of loans, grants, or technical expertise to help stabilize the economy and restore market confidence.

Market Sentiment: Positive changes in market sentiment, investor confidence, and global economic conditions can contribute to the resolution of a currency crisis.

Md Jasim Uddin Khan
Md Jasim Uddin Khanhttps://bmirror.net/
Writer is a social worker, formerly a senior reporter of The Daily Star

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