How to ease pressure on forex reserve TBS Report 29 October, 2022, 08:30 am Last modified: 29 October, 2022, 08:40 am
Illustration: TBS
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Illustration: TBS
All sources of foreign currency – export, remittance and foreign loan – have been on the decline. Remittance and export earnings have been at the lowest levels since January, the month before the Russia-Ukraine war broke out. But import expenditures, though marked some fall following central bank’s restrictions, are still high due to soaring global prices of food and energy. As a result, foreign currency reserves are depleting and the external balance is in the red. The trade deficit stood at a record $33.25 billion at the end of the outgoing fiscal 2021-22. At the same time, the current account deficit also surpassed $18.50 billion. Export sector sees a fall in order and fears further slide in the coming months. Fuel import bills show no sign of slimming, fertilisers remain pricier and if food prices go up further, foreign reserves will be under more stress.
Is doomsday nearing? Or, is there still a way out? Exporters say they will be able to prevent export fall if their factories get gas and electricity. As more Bangladeshis have gone abroad so far this year, a surge in remittance is expected in near future. Advanced economies are in need of skills and Bangladesh needs to focus more on skill development to benefit from the higher-paid job market.
Jahidul Islam of The Business Standard approached analysts to get their views on the deepening crisis and possible ways out.
Executing right moves key to prop up reserves
Dr Zahid Hussain
Former lead economist, World Bank Dhaka office
Illustration: TBS
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Illustration: TBS
Several measures taken by the government to shore up forex reserves are intended to reduce the demand for foreign exchange by reining in imports. These work with lags. There is so far no visible evidence that such initiatives are doing very well in preventing the reserve depletion.
The Bangladesh Bank has already sold about $4.8 billion this fiscal year, a much faster decumulation than last fiscal year.
The central bank’s major economic indicator report showed that LC opening and settlements rose in July and August. It reportedly declined in September.
There were talks of cutting down spending on locally-funded development projects. Indeed, local currency spending decreased in the Annual Development Programme in July-August by Tk800 crore.
While the disbursements of foreign aid came down in dollars, it increased in taka because of the currency depreciation. More austerity in domestically-financed relatively low priority development projects will be needed to make a dent on inflation and the demand for foreign exchange.
The export earnings and inward remittances are two prime sources of supply of foreign currency to boost reserves. The reserve growth will not be sustainable if earnings from these two sectors do not increase.
Since mid-September, remittances have been on the decline. What could be the reason for a drop in remittance inflows in September although expatriates sent home $2 billion each in the previous two months? I think the exchange rate cap for remittances has led to this fall.
The dollar rate in encashing export proceeds and remittances coming into the banking system outside exchange houses was set at Tk99, which was later raised by Tk0.5. As a result, many may be avoiding the banking channel to remit home.
There can be no other reason for the decrease in remittance inflows. Some 1.4 million people have left Bangladesh in the last year and a half. Most of them have gone to Saudi Arabia, Oman and the UAE, where there is no major crisis.
In all those countries, GDP growth is more than 5%. Inflation is in the 3-5% range. Employment and income have not dropped in all the countries. The cost of living of migrant workers is unlikely to increase much relative to their incomes. So, there is no reason for the fall in expatriate incomes from these destinations unless their willingness to remit has weakened, which is not plausible to assume.
Exporters get Tk99.5 per dollar and they would have to pay Tk104-105 for the same dollar to open LCs at import stage if they do not enjoy the bonded warehouse and back-to-back LC facilities. Exporters will be discouraged when they sell the same dollar at a lower price and buy at a higher price of Tk5-6.
Our policy already had an anti-export bias for years. This exchange rate regime has added to the pre-existing bias. There is little hope for rapidly increasing foreign exchange reserves by keeping in place multiple exchange rates that discourage foreign exchange earnings.
The government is reducing imports of fuel to ease the pressure on our forex reserves. But lower supplies of inputs will disrupt agriculture production and there will be a need for more food imports. Export earnings will drop too if they do not get necessary fuel, which may result in a foreign exchange loss larger than the amount saved. We can avoid this loss by spending additional $1.2 billion from the reserves to import natural gas.
Austerity can be counterproductive if all its consequences are not considered. Sri Lanka saved $400 million in reserves by stopping fertiliser imports, but had to pay $450 million to import rice as a result of reduced agricultural production. At the same time, a reduction in tea production caused foreign exchange earnings losses. For this reason, austerity initiatives should be taken, considering both the intended and the unintended consequences.
The initiatives to delay the implementation of import-intensive projects with domestic financing are good. It will be important to ensure full compliance with the announced intentions.
Short-term firefighting takes attention away from the medium- and long-term reform agenda. Balancing the two is essential, albeit tricky. Export diversification, financial sector resilience and orderly urbanisation rank at the top of the priorities in medium-term reforms complemented by actions on the long-term agenda of developing human capital, inclusive digitisation and adapting to climate change.
Skilled manpower needed to boost remittances
Dr CR Abrar
Executive Director, Refugee and Migratory Movements Research Unit
Dr CR Abrar. Illustration: TBS
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Dr CR Abrar. Illustration: TBS
The discussion about bringing stability to foreign exchange reserves by increasing remittances starts when any crisis appears. We need medium- and long-term measures to take remittance inflows to the desired level. However, there is a lack of government policies in this regard.
A skilled worker can remit several times more than an unskilled one. But there are no public and private initiatives to train our workers who intend to go abroad.
Government officials often say they have set up a large number of technical training centres in the country. But, in reality, the number of such facilities, with hardly any effectiveness, can never be a determinant of skill development.
The demand for manpower has increased tremendously in several sectors worldwide in the last few years. But we are missing out on these opportunities for the lack of skilled manpower required for these sectors.
Neither the Tourism Corporation nor the BMET has taken any effective initiative to grab a slice of the global manpower market.
There are enough training centres of various government agencies. We do not need to increase the number, rather we should focus on ensuring skilled training facilities.
A large number of young graduates remain unemployed every year due to lack of employment opportunities. We hardly see initiatives to arrange soft skills training, including on language, for them.
Prior to the Covid-19 pandemic, the demand of manpower was increasing globally in several sectors including hospitality, tourism, caregiving, driving. The demand in these sectors is now increasing again.
Now, it is necessary to identify the sectors where skills can be improved quickly with little investment and minimum training.
Unfortunately, we have a huge shortage of recruiting agencies who can send manpower abroad by developing their skills.
A few agencies, involved with ethical recruitment, are neither getting the government’s policy support, nor do they have any place in the Bangladesh Association of International Recruiting Agencies.
Plug illicit outflows, boost inflows
Dr Fahmida Khatun
Executive Director, Centre for Policy Dialogue
Dr Fahmida Khatun. Sketch: TBS
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Dr Fahmida Khatun. Sketch: TBS
Foreign exchange reserves are depleting so fast that it has become a cause for great concern. The trade deficit continues to widen as the import cost continues to outshine export earnings and the deficit is becoming more difficult to manage due to the downturn in remittance inflows.
With a looming global recession, export earnings are unlikely to pick up quickly, which translates to more pressure on reserves. There is no possibility of a reduction in import costs unless global commodity prices come down.
Repatriation of all types of earnings including the income of expatriate workers, and export proceeds would play a vital role to increase the reserves in time with a gloomy outlook.
One of the significant reasons for reserve depletion is illicit capital outflow caused by under-invoicing and over-invoicing at both the import and export stages.
Money is going out of Bangladesh at a rate that is unprecedented in any other country, which suggests that many people think of Bangladesh as not safe. They do not see a better future here.
The government should rein in capital outflows and remittance through informal channels by implementing existing policies and formulating new ones if necessary.
Currency support from the International Monetary Fund (IMF), budget support from the World Bank, Asian Development Bank (ADB) and other development partners would help to tackle the immediate pressure on the reserve.
The government should accelerate efforts to ensure the availability of such types of support even complying with conditions which would not hamper economic growth, employment and overall well-being.
But the problem is how many of the IMF loan conditions can be met. The government should ensure reforms from its own interest to ensure discipline in the financial sector, increasing revenue generation, reducing subsidies to nonindustrial sectors, and reducing corruption even out of the condition of the IMF.
Project support from foreign sources would help reduce reserve pressure and expand the government’s fiscal spaces also.
Slower implementation of the development projects hinders the opportunity of releasing from the pipeline of foreign aid committed by the development partners worth over $50 billion. Many projects have stalled due to a lack of efficiency, transparency and accountability.
Our export earnings are confined to a single product and to a few countries. If the demand for this product falls, there will be no other sector to retain the export income. The diversification of markets and products has been discussed extensively for years but to no avail.
Like exports, our remittances are also limited to a handful of countries. The tendency of sending our manpower to countries other than the Middle East and Malaysia is low. Apart from that, due to low skills, they are not able to earn as expected, nor are they able to remit adequate amounts back to the country.
Import substitution industries need attention too
Shams Mahmud
Managing Director, Shasha Denims
Shams Mahmud. Illustration: TBS
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Shams Mahmud. Illustration: TBS
We need to take necessary initiatives from now on to deal with possible challenges stemming from Bangladesh’s graduation to a developing nation. The European Union says it will not sign a free trade agreement (FTA) with Bangladesh anytime soon. We now have to continue FTA negotiations with major export destinations, including the EU.
To consolidate the forex reserves, we are not giving importance to the import-substituting industries as much as we prioritise the export sector.
Once the country comes out of the LDC status, there will not be much opportunity to protect domestic industries by imposing import duties.
Under the FTA, we will enjoy duty-free access to a country concerned and similarly, we also cannot levy duties on goods coming from there.
Costs of production in many countries are lower than in our country. If our production costs do not drop, there will be no chance to prevent imports from those countries.
If all sectors get timely support, our investment, employment as well as export earnings will go up. The amount of imports will also decrease, thus propping up the reserves too.
Our current foreign exchange reserves can cover four months of import expenses – it is more than for an export-oriented economy.
Many countries, either in recession or heading for that, are now slowing down sourcing of goods amid falling consumer demand caused by soaring inflation.
As we have been telling it repeatedly that our 35-40% growth in apparel exports may not be sustainable. The robust growth we witnessed last fiscal year was owing to advanced work orders by many buyers amid soaring cotton prices. The apparel sector will have a normal growth of 12-15% in future.
Even so, we are somewhat optimistic about a rise in the reserves in the future. Many buyers are moving away from China due to some issues. Marks & Spencer has already announced to stop sourcing from Myanmar. As such, it is expected that the reserve will be on the path of recovery from January.
However, if violence erupts like in the past with the next elections in front, it will be difficult to get orders like we experienced before.
On the other hand, due to the gas and electricity, if export products are not delivered on time, we will lose buyers.
If the government can sort out these issues, everything, including exports and forex reserves will be normal at the beginning of next year.
In the long run, enough investments and a business-friendly environment in the country must be ensured to keep the macroeconomics, including reserves, export earnings, exchange rates, free from stress. We should enhance competitiveness by reducing the costs of production.
The Military-ruled Myanmar also receives more foreign direct investment (FDI) than Bangladesh, mainly owing to a better business environment. We do not have necessary infrastructure and policy to attract sufficient FDI, which has remained below 1% of GDP for several years.
A long-term energy policy is needed to attract FDI alongside developing export industries. There will be no planned investments if fuel prices keep on going up.
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