Economy Desk: Usually, when a country has a large deficit in its balance of payments, it turns to the IMF. That is, when a country runs a trade deficit in terms of imports and exports.The IMF lends when there is a shortage of foreign currency, especially the dollar. The IMF provides long-term loans to countries under its mandate and reviews the measures taken by countries to increase their debt repayment capacity. It also suggests increasing the capacity of the economy, particularly by increasing revenue and reducing expenditure.
Almost all countries in the world hold large reserves in US dollars. Almost all countries have increased import costs due to the increase in the price of goods on the international market. The economic downturn has reduced export earnings and remittances. At the same time, investment has decreased. Due to these reasons, the reserve has also decreased.
Bangladesh’s international currency from independence until January 11, 1983 was the British pound sterling.Until then, the exchange rate fluctuated against the pound. Since then, Bangladesh has chosen the dollar instead of the pound as an intermediate currency. That starts with dependence on the dollar. The dollar is now the most widely used currency in the world. At various times, there have been discussions and initiatives to break the hegemony of the dollar. But in the end, the US currency got stronger. And this strong currency has exacerbated the current economic crisis.
According to the Central Bank report, 98 percent of Bangladesh’s foreign trade is done in dollars. Therefore, the dollar determines the dynamics of the country’s economy. Bangladesh has been facing a dollar crisis since March last year due to the increase in the price of fuel oil and food products in the world market. Import costs increase more than the country’s export and expatriate income. As a result, the dollar crisis caused prices to rise, which in turn increased inflation.
In the last year, the price of the dollar has increased by about 21 rupees. as commercial banks have increased in some cases. A rise in the value of the dollar has pushed up import costs, putting pressure on reserves. which messed up the whole economy. Initiatives to open LCs in alternative currencies to reduce pressure on the dollar have not been successful. Other countries devalued their currencies to increase expatriate and export earnings. However, instead of going this route, Bangladesh keeps the currency strong. But eventually, money loses its value. As a result, the crisis is more pronounced. The price of the dollar increased from 85 to 107 rupees.
To deal with the country’s dollar crisis, import credit was tightened.As a result, the average amount of export and expatriate income coming to the country every month is lower than the import cost. Still, the crisis remains. Because the foreign banks had previously financed the import, they now have to repay the liability. Interest has also increased. Again, there are various costs, including debt repayment in the public and private sectors, repatriation of profits from foreign companies, air fares, and medical services. As a result, Bangladesh Bank has to sell reserve dollars constantly. And now, most of those who are opening loans are taking up to six months to repay their debts. So it is not likely that the crisis will end soon.
In 2022, the central bank sold 12.61 billion dollars of its reserves. Central banks are now constantly selling dollars from reserves to meet import liabilities. Bangladesh Bank is selling 920 million dollars in reserves in seven months, from July 2022 to January 2023. Never before in the country’s history have such large sums of money been sold from the reserve, even in a single fiscal year.Earlier, during the entire fiscal year 2021–22, $7.62 billion was sold from reserves.
On July 5, 2022, Bangladesh Bank imposed restrictions on the opening of LCs. Importers will not get any kind of loan facility from the bank for importing all types of motor cars, electrical and electronic items used as home appliances, cosmetics, jewelry, ready-made clothes, household electrical items or home appliances, and beverages. When opening import credit for these products, a 100% cash margin should be maintained.However, banks are directed to maintain a cash margin rate of at least 25 percent for the establishment of letters of credit (LC) against imports of all commodities other than imports of baby food, essential food products, fuel, life-saving medicines, local and export-oriented industries, and agriculture-related products.
The number of letters of credit, or LCs, opened for the import of goods has started to decrease due to the reining in of import expenditure. Bangladesh Bank’s updated product import data shows that in the first six months (July–December) of the current financial year, the opening of letters of credit, or LC, has decreased by 26.50 percent. And at the same time, the settlement decreased by 1.56 percent. The government and the central bank have taken initiatives to reduce the import liability to reduce the pressure on reserves. Although new LCs have come down, the cost of foreign exchange has not come down due to the pressure of repaying previous liabilities.
Bangladeshi importers have been complaining for the past few months that they are unable to open letters of credit, or LC, despite contacting several banks due to the dollar crisis. As a result, the import of many essential products has decreased, and their prices are increasing in the country’s market.
Bangladesh has not faced such problems with foreign exchange for the last decade. because both remittances and exports have done less well during this period. But now, due to the situation that has developed in the world, there is a negative impact on remittances. Exports are good, but the rate at which imports have increased has created pressure on the balance of payments. The economy of Bangladesh is now in a crisis over foreign exchange reserves. As a result, the International Monetary Fund (IMF) received 4.7 billion dollars.
