Foreign exchange reserves of a country define its macroeconomic stability, while it increases eligibility for getting foreign loans and attracts foreign investment
Bangladesh’s foreign currency reserve has registered more than 450% growth in the last ten years, thanks to steady economic growth and resilience of major external sectors, analysts said.
According to Bangladesh Bank (BB) data, as of September, foreign exchange reserves stood at $31.95 billion, up by 450.86%, from $5.8 billion in December 2008.
The country’s foreign reserves rose sharply mainly due to steady economic growth, including robust export earnings as well as healthy remittance inflows in the last several years, trade analysts and economists said.
They said both remittances and exports showed resilience over the years, even with turbulent overseas markets.
“The country’s economic activities have increased significantly over the last decade. Besides, remittance inflows and foreign investment have also surged,” Centre for Policy Dialogue (CPD) research director Khondaker Golam Moazzem told the Dhaka Tribune.
In addition, foreign fund inflows such as loans and grants went up, helping the economy to have a healthy foreign exchange reserve, said Moazzem.
“Foreign exchange comes mostly from exports, remittances, foreign aid, and grants, as well as Foreign Direct Investment (FDI). As a whole, Bangladesh has performed well in these categories,” Bangladesh Bank Chief Spokesperson M Serajul Islam said.
As a result, in the last ten years Bangladesh has seen a sharp rise in foreign exchange reserves, which has improved the country’s financial stability, said Islam.
According to the Export Promotion Bureau (EPB), in the July-October period of current fiscal year 2018-19, Bangladesh earned $13.65 billion, up by 18.65% from the same period last year.
Also, Bangladesh's remittances increased to $14.98 billion in FY18, up 17.31 % from last year.
The inflow of remittances rose by 6.55% to $1.24 billion in October, 2018, compared to $1.16 billion in the same month last year.
How a sound forex reserve is beneficial
Foreign exchange reserves of a country define its macroeconomic stability, while it increases eligibility for getting foreign loans and attracts foreign investment.
“In case of insufficient foreign exchange reserves, a country like Bangladesh faces trouble in getting loans from other countries and global lenders,” Khondaker Golam Moazzem said.
So, the present status is good for Bangladesh in availing loans and attracting new investment as a healthy foreign exchange reserve indicates the macroeconomic stability of a country, said the economist.
When and where to invest foreign exchange
Steady growth in the country’s economic activities has pushed the reserve of foreign exchange upward. But this should be used for financial benefits. In getting benefits from foreign exchange reserves, Bangladesh can invest its excess reserve.
“In the last few years, the Bangladesh economy has grown along with improved remittance and export earnings. But it is not being utilized to reap benefits for the economy,” former BB governor Salehuddin Ahmed told the Dhaka Tribune.
Excesses foreign exchange resembles excess liquidity. Though the return on investment may be small, it should be logically utilized said the economist, suggesting considering making investments in infrastructure projects like the Padma multi-purpose bridge.
He also said that investments can be made after keeping a six month equivalent of import bills as reserve.
If the upward trend of foreign exchange reserves continues, and the amount seems to be enough to pay import bills for a certain period, Bangladesh can make short term investments in sovereign bonds, said Moazzem.
The BB cannot set a benchmark on the amount of foreign exchange reserves to invest, as imports can rise sharply at any time, while exports can fall or see slower growth, or zero growth, said M Serajul Islam.
When the central bank thinks there is enough in foreign exchange reserves, considering the present status of the export-import situation, it can make investments and profit from excess forex reserves , said Serajul.
In making investments, the risk factors for investment and profitability are seriously taken into consideration, said the spokesperson.
However, World Bank, Bangladesh lead economist Zahid Hussain said the present forex reserve amount is enough to meet any crisis and import bills, but it is not investable yet.
The adequacy of foreign exchange reserves depends on the country’s status in terms of economic vulnerability and its import-export situation, he added.
“The minimum amount should be kept as reserve to pay import bills for three to eight months. The present amount is enough and Bangladesh can invest if the forex reserves go up to the amount required to meet eight months of import payments.”