The Bangladesh Bank is due to finalise the net reserve calculation today and the figure is expected to be $15 billion, meeting the international benchmark of three months’ worth of import expectations.
Bangladesh’s net foreign exchange reserves are set to surpass the $14.7 billion target set by the International Monetary Fund (IMF) in June for the first time since the multilateral lender’s $4.7 billion loan package was approved in February last year.
The Bangladesh Bank is due to finalise the net reserve calculation today and the figure is expected to be $15 billion, meeting the international benchmark of three months’ worth of import expectations.
Net reserves are calculated as gross reserves minus short-term liabilities according to the IMF formula based on the Balance of Payments and International Investment Position Manual (BPM6).
This represents readily available cash from total reserves and is expected to rise to $22 billion by the end of June from $19.4 billion as of June 26, central bank sources said.
According to the second assessment report under the IMF’s loan package, net reserves fell below the benchmark to $12.8 billion in April from $19.6 billion at the end of June 2023.
Inflation picks up as target reached in June
But the price of Bangladesh meeting the IMF’s June target was a squeeze on imports, which led to accelerating inflation due to higher fuel costs and slowed the country’s economic growth.
In his letter to the IMF, the Bangladesh Bank governor acknowledged that the continued squeeze on imports has slowed economic activity, while high global commodity prices and the persistently weak taka have kept inflation high, with a disproportionate burden on the poor.
According to Bangladesh Bank data, the country’s imports fell 15.42 percent in the first nine months of FY24.
Moreover, loan inflows of $2 billion — of which $1.15 billion came from the IMF and $900 million from other sources as budget support — have also helped Bangladesh surpass the IMF’s net reserve target.
Also helping is the halt to dollar sales from the country’s foreign exchange reserves. Bangladesh Bank stopped selling dollars from its foreign exchange reserves from May 8 after implementing a new crawling peg that pushed the dollar’s price up from 110 taka to 117 taka in a day, marking the biggest devaluation in the country’s history.
Tightening of fuel imports
The central bank’s curb on dollar sales has also led to delays in foreign payments, forcing Bangladesh Petroleum Corporation (BPC) to cut fuel imports.
According to Bangladesh Bank data, oil imports in July-March FY24 fell 8 percent from a year earlier, after growing 16 percent in the same period last year.
Negative growth in foreign direct investment
Bangladesh Bank’s dollar-saving stance has put many foreign companies in a bind as they are unable to remit their earnings back home. As a result, they are reinvesting their earnings instead of making new investments, causing negative growth in foreign direct investment (FDI).
Moreover, many other foreign companies listed on the stock market declare low dividends as they are unable to repatriate profits.
For instance, cash dividend payouts of 10 Bangladeshi multinational companies for 2023 fell 31 percent from the previous year due to difficulties in trading foreign currency to remit to foreign shareholders.
As a result, Grameenphone, Bangladesh’s largest mobile phone operator, has also declared a 125 percent cash dividend to shareholders for 2023, the lowest since 2010.
BAT Bangladesh also halved its cash dividend for 2023 to 100 percent, the lowest rate in more than a decade.
How BB calculated its $27.15 billion reserve
Bangladesh Bank Executive Director and Spokesperson Md Mezbaul Haq told media on June 27 that the provisional total reserve figure was $27.15 billion.
He claimed that the reserves had increased due to the inflow of $2 billion in loans from the IMF, South Korea, IDB, IBRD and others.
However, the figure is inflated as it was calculated based on the old BPM5 formula, which was phased out 10 years ago; Bangladesh Bank has adopted the new BPM6 method since June.
According to BPM6, total reserves are $22 billion.
According to the IMF formula, every country will follow two calculations – gross reserves and net reserves. When the IMF introduced BPM6 in 2012, it also provided components for the calculation of gross and net reserves.
Bangladesh Bank ignored the new calculation for 11 years and published over-inflated total reserves. Then in 2023, Bangladesh Bank adopted the new calculation to meet the terms of a $4.7 billion loan package. After the new calculation, Bangladesh Bank had to exclude $7 billion from its total reserves.
But even after adopting the new calculations, the central bank again announced an inflated reserve figure of $27.15 billion.
