A country’s economic health can be discerned accurately by two major indicators – export earnings and remittance inflow, and Bangladesh posted negative figures for both the indices this September, a telltale sign of mounting pressure on the forex market and macroeconomy.
Despite optimism from the banking regulator and policymakers, the country earned $3.9 billion from exports this September, recording a 6.25 per cent negative growth compared to $4.16 billion posted in the same period last year, show data from the Export Promotion Bureau (EPB).
Remittance inflow took a significant blow as well. Bangladeshi expatriates sent $1.53 billion this September – which is a seven-month low and a 10.84 per cent decline from $1.72 billion recorded during the same month last year, according to latest data from the Bangladesh Bank.
Besides, the remittance inflow posted in September is a 20.42 per cent decline compared to that of August 2022.
Several industry insiders and experts blamed the negative export earnings on the ongoing global economic situation, and local energy crisis, adding that the fixing of USD rate for remittance collection negatively impacted the inflow.
Though the Bangladesh Bank had introduced a series of initiatives to reduce import payments, in a bid to reduce pressure on the foreign exchange market, such payments grew by 16.96 per cent to $12.69 billion during the first two months of FY23, when compared year-on-year.
As a result, the current account deficit continues to go up. The negative current account balance reached $1.50 billion during the July-August period of this FY, up from $1.41 billion recorded in the same period last FY, show latest data from the central bank.
‘Economy not doing well’
Speaking to The Business Post, former lead economist of World Bank Dhaka office Zahid Hussain said, “This situation indicates that Bangladesh’s economy is not doing well, and the current events could increase pressure on the forex market, which is already in trouble.
“The multiple exchange rates of USD have negatively impacted our remittance earnings.”
The central bank last month allowed a floating exchange rate for USD to reduce pressure on forex reserves, but the fall continues, hitting $36.44 billion on September 28.
However, the usable reserves are even lower than the abovementioned figure – only $29 billion, according to regulator data. During the first quarter (July-September) of FY23, the regulator pumped over $3 billion from forex reserves to stabilise the USD exchange rate.
“The new rates of USD set by the Bangladesh Foreign Exchange Dealers Association (BAFEDA) and the Association of Bankers, Bangladesh (ABB), after a floating exchange rate was allowed, is the key reason behind the decline in remittance earnings,” Zahid Hussain further said.
The apex body of dealer banks on September 11 had set a maximum USD rate of Tk 108 for foreign exchange houses to collect remittance and Tk 99 for encashment of export bills.
The USD rate for remittance collection was re-fixed to Tk 107.50 per USD on September 27, and the move will be effective from October 1. This may come as another blow to the remittance earnings, experts say.
Before fixing the rate, banks were collecting remittance with rates as high as Tk 114 per USD, insiders say.
Zahid Hussain believes that the hundi system – a type of illegal cross border transaction – is once again gaining prevalence due to the multiple exchange rates for USD for remittance earnings, import payments and encashment of export bills.
The economist added, “Bangladesh’s export earnings will decline further due to the new exchange rates, because there is a tendency to keep the export earnings abroad by under-invoicing.
“The money will be sent later through exchange houses because there are multiple rates for remittance earnings and encashment of export bills. The price of USD will increase further.”
The highest interbank exchange rate of USD on September 29 was Tk 107.50 per dollar.
Echoing the same, Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said, “The present economic scenario indicates that the forex crisis will deepen further.
“The forex market will not stabilise anytime soon as the export earnings will not increase in the upcoming days. The destination countries are facing a multitude of issues, including economic crisis and impacts of the Russia-Ukraine war.”
He added that a large amount of foreign currency is also leaving the country because an increasing number of people are going abroad for education and medical purposes.
What can be done?
Economist Zahid Hussain provided three pointers to reduce the pressure on the forex market. First, the government will have to ensure the implementation of austerity measures, recently taken to reduce import payments.
Second, the central bank will work on fixing a uniform exchange rate instead of multiple exchange rates for the USD. Third, the government should withdraw the interest rate cap and raise interest rates to reduce pressure on the forex market, he recommended.
Mansur too put an emphasis on the withdrawal of interest rate cap. He added, “The central bank’s decision to not withdraw the interest rate cap means that the local currency will remain cheap.
“Bangladesh will not be able to end the forex crisis anytime soon if it decides to keep the local currency cheaper.”
Zahid pointed out that the private sector credit growth increased to 14.07 per cent in August due to the lower interest rate, and it will create more inflationary pressure on Bangladesh’s economy.
The general inflation rate stood at 7.48 per cent in July this year, however the Bangladesh Bureau of Statistics (BBS) is yet to unveil the rate for August. Several experts say the inflation rate could hit around 10 per cent in August due to the jump in fuel prices.
BB measures to ease crisis
The government and the Bangladesh Bank have introduced several policy changes in a bid to ease the pressure on the country’s foreign exchange reserves.
The government in August increased the duty and taxes on 300 non-essential and luxury items such as SUVs, mobile phones and home appliances.
Before that move, the banking regulator in July asked banks to report about all types of foreign exchange transactions, including those of offshore banking operations. On May 10 of this year, the central bank toughened its rules for luxury item imports.
A day later, the government decided to stop foreign trips of its officials and postponed the implementation of less important projects that require imports.
