Maintaining inflation of reserves a big challenge for Bangladesh Bank

Recently Bangladesh Bank's foreign exchange reserves are decreasing. There are various reasons for the decline in reserves. We have several sources to earn foreign exchange. Among these, export of goods and services, export of manpower and foreign direct investment are significant.

So far we were mainly earning foreign exchange from these few sources. Almost all of the foreign exchange earned from remittances adds value to the national economy. As we know, this sector does not have to import any foreign raw materials and capital machinery. But for a long time we have been observing that a large number of Bangladeshis (about 23 lac) are going abroad for employment but surprisingly, the remittances are not coming that way. On the contrary, even if 10 lac people returned to the country, rest 13 lac people are staying abroad. Such a large number of people went abroad but we do not know how much remittance they sent.

Though an increasing number of manpower has gone abroad but the amount of remittances sent is steadily decreasing. Moreover, they are surely earning. But the money they earned is not coming to the country properly or legally through banking channels. Besides, there is no reason to believe that the earnings of expatriate have decreased. Foreign exchange earned by expatriate Bangladeshi workers does not touch the borders of Bangladesh. Additionally, Hundi traders are taking money earned by expatriate Bangladeshis. In contrast, expatriate workers' families are being paid in Bangladeshi currency. As a result, a large part of the money is not added to the reserves of Bangladesh Bank.

In recent times, there has been an increase in the tendency of expatriate Bangladeshis to remit money earned through hundi to the country. There is a general feeling among people that political unrest will be increasing in the coming days. The political situation is also getting increasingly complicated. Among commodity exporters there is also some apprehension about possible political instability. Following ‘wait and see’ policy, they are thinking, let's delay a bit in bringing the export income to the country, and see where the situation goes. They also think that the value of the US dollar in the local market will increase further in the future. Therefore, if the earned export earnings are kept for some time, the exchange rate can be obtained higher.

There are also some exporters who keep a large portion of their export earnings abroad through under-invoicing. When money laundering increases in an economy, it also affects international trade. A class of importers also launder money abroad by over invoicing by showing higher prices of imported goods. Various organizations are claiming that a huge amount of money is being smuggled abroad from Bangladesh under the guise of international trade.

A few years ago, Washington-based organization Global Financial Integrity (GFI) mentioned in a report that 64 thousand crore Taka are smuggled out of Bangladesh every year under the guise of international trade. Some may disagree with these figures, but there is no doubt that a huge amount of money is being laundered from the country every year. Bangladesh Bank has recently been taking various measures against money laundering. But it is impossible to say with certainty how much benefit those measures are giving. The money we receive from international financial institutions such as the World Bank, IMF or ADB will continue to flow as usual. But foreign direct investment has come down a lot. If there is no political and social stability, foreign investors would not be interested in investing in that country.

Short term credit, trade financing is also a problem. Bangladeshi businessmen are unable to settle their LCs (Letters of Credit) due to shortage of US dollars. Foreign suppliers have provided products. If they don't get their dues on time then there will be problems. Decline in LC settlement is causing problems. LC margins are increasing. USD 2 billion in trade financing has gone negative in the last two months. If the post-election government is unstable, the condition of the reserve may worsen. It does not seem that much reliance can be placed on remittances in the future. Besides, there is pressure to repay USD 12 billion short term credit. This amount must be paid. Imports of daily essentials have come down a lot. What was once a monthly import of 8 billion US dollars has now come down to 4.5 billion US Dollars.
Import costs are no longer possible to reduce. Rather, it should be increased. National election is ahead. Ahead of the elections, the supply of daily products should be increased for the common people. At the same time, in the name of reducing the cost of import, we should also ensure that the import of raw materials and capital machinery used in the industry does not decrease. If the import of industrial raw materials and capital machineries decreases, the production will decrease. Employment opportunities will shrink. At the final stage, the government's poverty alleviation program will be disrupted.

All in all, maintaining the inflation of foreign exchange reserves has emerged as a big challenge for Bangladesh Bank. Right now, Bangladesh Bank can increase the rate of 'bank loan interest'. If it is not possible at once, Bangladesh Bank can increase the interest rate of bank loans step by step. Recently, Bangladesh Bank increased the policy rate by 0.75 percent. And the bank loan interest rate has been increased to 0.50 percent. Policy rates and bank lending rates should have been raised in parallel. However, we can call the increase in bank loan interest as 'something is good for nothing'. But we should not stop here. Bank loan interest rates should be increased. I think, bank loan interest rate should be market based. If that is not possible at the moment, especially on the eve of national elections, bank loan interest rates should be gradually brought closer to the market base.

Among the expatriate Bangladeshis who come to the country, they sell their foreign currency in the market. But the amount is not much. In fact, expatriate Bangladeshis are not sending their earned foreign currency back home. They hand over foreign currency to hundi traders from their workplaces and Hundi traders remit money to local beneficiaries of expatriate Bangladeshis through their local agents. It means, earned foreign currency does not actually come to the country. It is transacted from abroad.
Since there is a kind of uncertainty in our country regarding the national elections, there is a danger of increasing money laundering from the country in the future. Every time there is uncertainty about national elections. But this time the situation is more complicated than ever before. So those who have earned money illegally are worried. Over the years, many have used their political identities to acquire huge wealth. It is natural that they would want to smuggle as much money as possible abroad for fear that they may face problems if the government changes. They have good reasons for such demands. So they don't want to take that risk. Money is laundered from Bangladesh in various ways. Among them, various international organizations are publishing information that most of the money is being smuggled under the cover of international trade. According to one source, export earnings equivalent to at least US$ 7 billion remain overseas. Bangladesh Bank has recently advised Scheduled Banks to take necessary measures for speedy repatriation of export earnings. Foreign exchange reserves will increase to some extent if the portion of export earnings that remain abroad is brought home quickly.

There is concern over the current level of foreign exchange reserves of Bangladesh Bank. If it falls further, problems may arise. So we need to take necessary measures now. Bangladesh Bank has recently increased the amount of cash financial incentives on remittances of expatriate Bangladeshis. It should make expatriate Bangladeshis interested in sending remittances to the country through legitimate i.e. banking channels.

We need to take measures so that the flow of foreign exchange earnings is smooth and dynamic. At the same time import of unnecessary and luxury goods should be controlled. However, it should be ensured that imports of raw materials, capital machineries and intermediate goods used in industry would not be decreasing.

Author: Economist and Executive Director, Policy Research Institute (PRI)

Transcript from speech: MA Khaleque