• Monday, Sep 26, 2022
  • Last Update : 10:24 am

BB just made the debate on using forex reserves more polemic

  • Published at 06:14 pm March 13th, 2021
Bangladesh forex foreign exchange reserve

The government-owned companies will be eligible to take loans from the central bank reserves against the sovereign guarantee

The idea of using the foreign exchange reserves, a safety net for a nation, is contentious enough on its own. 

And now the ten-member committee formed last year by the central bank to formulate a policy on how the reserves can be used locally has come with a suggestion that will make the discussion decidedly hot-button.

The committee, headed by Bangladesh Bank Executive Director Mohd. Humayun Kabir, recommends letting only state-run companies, which are problematic enough on their own, take loans from the reserves.

The draft policy was submitted to BB Governor Fazle Kabir on March 11. If Kabir signs off on it, it would be placed before the central bank board for final approval, said a top BB official well-versed with the proceedings.

The government-owned companies will be eligible to take loans from the central bank reserves against the sovereign guarantee, according to the draft policy on local use of the reserve.

A sovereign guarantee is a promise by the government to discharge the liability of a third person in case of default.

The state companies must earn in foreign currency to get loans from the forex reserves, which are held and managed by the central bank. 

“The risks have been kept to a minimum,” he said, adding that the draft policy has been prepared by reviewing how the foreign currency reserves are used in different countries.

As China’s stock of foreign exchange reserves hit $2 trillion in 2009, it used a portion of it to recapitalise state banks and also form a sovereign wealth fund.

Closer to home, last year as India’s reserves hit $550 billion, discussions began of putting the build-up of foreign currency to work for the economy seeing the government finance were constrained.

Economists in the neighbouring country strongly opposed the move, so a decision is yet to be taken on that front.

In Bangladesh, the topic of using foreign exchange reserves has been in the discussion for several years now.

But the discussion got momentum in July last year when Prime Minister Sheikh Hasina at the meeting of the Executive Committee of the National Economic Council directed the relevant departments to explore possibilities of utilising reserves for the betterment of the economy, particularly for the implementation of major infrastructure projects.

This prompted the Orion Group, a business giant, in August last year to apply for a $906.17 million-loan (Tk 7,684.3 crore) from the reserves by way of state-owned Rupali Bank to set up a coal-fired power plant. 

The BB officials maintain that private companies would not be eligible for loans from the reserve.  

Then on January 4 this year, the Bangladesh Independent Power Producers’ Association, a trade organisation of independent power producers, sought loans from the central bank’s pool of foreign currency. 

The independent power producers want to build new power plants by taking loans from the reserve.

Like in India, the suggestion of dipping into the reserves for lending purpose or infrastructure financing treaded on thin ice with economists here, too.

“It is not a wise decision,” said Zahid Hussain, a former lead economist of the World Bank’s Dhaka office.

Foreign exchange reserves are an important tool in case of disaster management and propping up market confidence.

While reserves equivalent to three months’ import bills are good enough, having a buffer of seven to eight months is advisable, he said.

Besides, the rising trend of foreign exchange reserves would not sustain in the coming days as the economy is recovering from the pandemic hit.

The massive growth in remittance helped to raise the foreign exchange reserves last year but now the inflow of remittance has started to contract.

Besides, lending from the foreign exchange reserves would make it complicated for Bangladesh to get loans from multilateral lenders, he said.

Foreign lenders typically observe the state of reserves of a country before making a decision.

“Healthy reserves positively influence their decisions.”

If the lenders deem it risky, they reduce the terms of the credit and increase the risk premium, Hussain added.

“There is no logic or legal basis for using reserves,” said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

While money is needed to implement the budget and for implementing mega projects, it should be by way of the foreign exchange reserves, said Mansur, a former economist of the International Monetary Fund.

However, there is merit to the argument that the central bank may need to keep an eye on returns as its stock of foreign currency grows.

As of yesterday, Bangladesh’s foreign exchange reserves stood at $42.97 billion. 

Of the sum, $700 million is invested in gold deposited in the Bank of England, with the rest invested in liquid assets like US Treasuries and Euro-denominated bonds of other advanced economies.

Most of these economies have seen interest rates fall to near zero, with some securities even trading at negative yields.

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