Forex shortage: A brief diagnostic review

Our importers and institutions, those that need to remit various fees and surplus earnings outside the country, are facing challenges with foreign currency (FCY) payments for the last several months.

Although initiatives have been taken to bring down imports, especially of luxury items, and the monthly import average in dollars has come down from $8 billion to $6.5 billion in recent months, the situation is not improving.

Banks are frequently denying to open letters of credit (LCs) due to the shortage of FCY. On the other hand, concerns are growing among local and international investment communities. Since more than 60 per cent of our imports are known to be capital machinery and industrial raw materials, analysts are of the opinion that it might seriously impact our growth trajectory too.

Bangladesh’s forex reserves fell to $34 billion (including export development fund and others) in recent times. Speculation is rampant around the actual reserve that has been declared officially and is leading to exchange rate changes that are unrelated to the underlying pattern of trade, causing more uncertainty.

The rate of reserve depletion is alarming, and even the much-hyped IMF loan might not be enough to help.

Opening of new LCs has been reduced, but the liability of previously opened LCs is now payable in terms of arrears or late payment. Due to this, the dollar crisis is becoming more acute. Experts opined that under-invoicing and over-invoicing of imported goods have added to the dollar crisis, which prompted the central bank to impose margins.

Curbing imports is turning into a futile attempt, as imbalance in export-import, high dependency on imported oil and gas, and decreasing trend in inward remittance flows continue.

Force fixing special exchange rates for different instances is already creating confusion and chaos in the market and this is adding even more undesired volatility. Volatility in the value of the dollar is impeding businesses from making deals with overseas entities.

The export-oriented industries are struggling to calculate production costs due to instability in the value of foreign currencies. Exchange rate volatility is creating uncertainty about returns as well as costs, thereby restricting investments. 

Now we must think about how to meet these challenges. To begin with, we need to emphasise increasing remittances.  According to the World Bank, Bangladesh is the seventh highest receiver of remittances in the world.

Inflow of foreign exchange hit a record high of $24.77 billion during fiscal 2020-21 and fell to $21.03 billion the next year. The authorities have recently suspended cash out from 230 customer accounts with four MFS providers to prevent the transaction of remittances through hundi.

The intention is to deter users from relying on hundi and encouraging expatriates to use the formal channel. However, the actual benefits to the end users remain debatable.

It has been repeatedly mentioned that dollar rates should be left to the market and not artificially controlled. If the exchange rate is free to float, then it can change in response to external shocks like oil price rises. This should reduce the negative impact of any such external shocks theoretically.

The authorities need to revisit the economic policies according to the changing global trends and should focus on diversification of economy to repel future mishaps. Focus on under-invoicing should help NBR with increased revenue earnings but we should be focusing more on capital flight outside the country through over-invoicing, which warrants better governance and discipline in the banking sector.

The author is an economic analyst.