Forex reserves recede further

[Published: December 01, 2022 08:48:29 | Updated: December 01,

2022 16:50:39.]

Bangladesh's foreign-exchange reserves dropped below the official US$34-billion

mark despite belt-tightening measures to stall the fall to navigate internal and
external headwinds on the financial front. This is the first time the reserves have
gone down the level of US$34 billion since April 2020, according to Bangladesh
Bank (BB) data. The BB count showed the forex reserves having fallen to US$33.86
billion Wednesday from US$ 34.05 billion recorded on the previous day (Tuesday),
although a recent IMF assessment put the figure far below by discounting an EDF-
funding amount. Talking to the FE, a BB official said the reserves went down
US$34 billion after a long time, probably after the early stage of Covid-19
pandemic. He said the downturn in the foreign-currency reserves continued because
of a gradual fall in earnings from export and remittance in recent months.
Simultaneously, selling dollars from the central bank to the commercial banks for
meeting their foreign-currency obligations to pay the import bills continues
rising."These are probably the reasons behind the gradual fall in forex reserves," he
adds. According to the official data, the central bank has so far sold US$6.50 billion
to the banks since July 2022--amid a dollar dearth here and the world over. The
significant fall in reserves, particularly the greenback, comes as a matter of concern
for the economy which is under stress amid Bangladesh's falling foreign-exchange
reserves, dragged by higher import payments against lower export earnings and
remittance inflows. To shield the reserves, the central bank took various initiatives,
like discouraging imports of non-essential goods, strict monitoring of pre-and post-
LC opening and move to raise exchange rate of the dollar that BB sells to banks.
Despite all the measures, the gradual fall of reserves cannot be controlled.
Economists suggest that the policymakers go for quick assessment of their reserve-
protecting moves as these are observed not efficient enough to save the stock of the
greenback. Research director of local think-tank Centre for Policy Dialogue (CPD)
Dr Khondaker Golam Moazzem says the central bank took various steps to protect
the reserves but, unfortunately, that are not working. "I think there is probably a
leakage between the announced programmes and implementation of those. BB needs
to evaluate this as quickly as possible," he adds. The economist says the BB has
taken measure to prioritize import of essential goods, which was good. But the list
of essential items is quite long. "Now, we need to further categories the list and
spend dollars for only the most essential items as the reserve is getting squeezed
fast," he suggests. Mr Moazzem also suggests that the government should leave the
mindset of maintaining normal-time economic growth. Instead, it should use the
reserves considering the lower-balance economic growth. Chairman of Policy
Exchange of Bangladesh Dr M Masrur Reaz thinks the government ought to increase
the supply of dollar to avert unbearable pressure on the economy in the days to
come."Otherwise, it would trigger panic, severely disrupting business activities," he
says. Getting the real benefits of the austerity measures by the BB, the earnings
from exports and remittances have to be enhanced anyhow, according to him. For
raising export outcomes, he suggests that the government must ensure uninterrupted
supply of gas and power to the industrial hubs to ensure cent-percent productivity.
Simultaneously, the difference in rates of dollar between banking system and kerb
market needs to be narrowed as quickly as possible alongside taking measure to
further devalue the local currency to attract the remitters for sending their money in
formal channel. The country witnessed fall in remittance inflow in the just-past
October with an earning of US$ 1.52 billion, down by 7.37 percentage points year
on year, as expatriates had sent $1.64 billion in the same period of 2021. Even
remittance recorded 24.4-percent monthly fall in September as well. Export is
another prime source through which the country earns significant volume of foreign
currencies, but its trend is not going well as the country's single-month
merchandise-export earnings in October this year declined 7.85 per cent to US$
4.35 billion, year on year, mainly because of the economic slowdown in the
European Union caused by the Russia-Ukraine war. Bangladesh's exports fetched
$4.72 billion in October 2021. The October'22 earnings also fell short of the target
by 12.87 per cent, according to Export Promotion Bureau (EPB) data.

Interest equilibrium implies uncertain economic outlook

Published: November 19, 2022 08:49:18 | Updated: November 19,
2022

Bangladesh's treasury yield curve has now flattened further due, many believe, to
hikes in policy rates and other regulatory moves tightening the monetary stances to
fight stubbornly high inflation. The shape of yield curve, also called a 'snapshot' of
an economy, helps investors get a sense of the likely future course of the interest
regime with its economic implications-for the better or the worse to come. A normal
upward-sloping curve means that long-term securities have a higher yield while an
inverted curve shows short-term securities having a higher yield. The flat- yield
curve implies an uncertain economic outlook. According to economic literature, a
flattening curve may come at the end of a high economic-growth period that is
leading to inflation and fears of a slowdown. And this may appear at times when the
central bank is expected to increase interest rates. However, Bangladesh Bank (BB)
has been plotting secondary-market yield curves alongside the primary-market
cutoff yields on regular basis. Contacted for comment on the current shape of yield
curve, some central bankers argued that the interest on deposits has been increased
crossing over the 6.0-percent cap on grounds of higher inflation persisting in the
economy. The BB has directed banks and financial institutions to maintain at least
1.0- percentage point of the inflation rate in interest calculation. This is applicable
to time deposits having the bigger shares in total deposits. "Since the deposit rate
has been hiked but the lending rate remained the same at 9.0 per cent that's why the
yield curve has flattened," one central banker, who is familiar with the
developments on the financial front, told the FE on Thursday, after the flattening of
treasury yield curve a day before. He also said there were many moves pertaining to
policy-rate spikes and tighter monetary stances that all have contributed to the
yield-curve movements. "Actually such developments on the money market have
reflected on the worries of the investors towards the investment in the risk-free
instruments." Leading economists having direct knowledge of the financial market
told the FE that yield curve is a good indicator but the existing curve does not
reflect the "real picture" of the economy. They point out that Bangladesh Bank often
intervenes in the market through the purchase of bonds. Such interventions do not
help raise the yields naturally. They think this is more or less predicting the course
of economy. "Bangladesh Bank intervenes on the market and it buys to halt the
natural market behaviors of the yields," says Dr Ahsan H. Mansur, executive
director of the Policy Research Institute of Bangladesh (PRI). When the yield inches
towards 9.0 per cent, the Bangladesh Bank purchases the bonds so that interest
cannot cross the 9.0-percent cap, Dr Mansur points out. Such intervention actually
leads to 'market failure', says the economist. Another economist, Dr M. Masrur
Reaz, chairman at the Policy Exchange of Bangladesh, told the FE that yield curve
has implications as investors are not interested in the long-term bonds as they
believe there are more uncertainties in the economies. "The flatter curve means all
maturities have almost same yields as the investors prefer short terms," he notes.
The treasury finances government budget obligations by issuing various forms of
debt instruments, including treasury bills, with maturities from 91 days out to one
year, and bonds from two years to 20 years. Shapes of yield curves and implications
show that, typically, the yield curve slopes upwards because investors expect more
compensation for taking on the risk that rising inflation will lower the expected
returnd from owning longer-dated bonds. Longer-dated bonds, for example, 20-year
bonds, typically yield more than short-dated bonds due to the longer duration and
risk associated with the period. A steepening curve typically means that there is a
prospect for stronger economic activity. As the yield curve steepens, banks and
other financial institutions are able to borrow money at lower interest rates and lend
at higher interest rates although Bangladesh has caps both on lending and deposits.
During the recent visit for assessing Bangladesh's creditworthiness pending a
USD4.5 billion worth of loan, an IMF mission pressed the central bank and the
finance division to go for market-based rates instead of artificial caps. When the
flattening curve appears, the investors expect rate hikes in the near term and lose
confidence in the economy's growth outlook. Under such a situation, short-term
yields increase and banks tend to raise their benchmark rates for their products and
loans. SME loans and credit cards and consumer loans become expensive. There is
another shape of the curve that is more worrying for an economy-inverted yield
curve. This appears when the short- term yields become larger than the longer-term
yields. Typically, this is seen as an ominous sign for an economy. The BB has been
plotting a yield curve after each auction based on the primary-market performances.
Banks and financial institutions usually use it as benchmark rates. The banks have
been accustomed to this for long. After the beginning of trading on the bourses, the
central bank of Bangladesh started plotting the secondary yield curve. The
secondary-market yield curve is more representative. Almost all economies rely on
it as it truly gives a picture of the economy. This is the best practice for financial
institutions to abide by the secondary-market yield curve. It is an indicator of how
the economy will behave. In the midst of latest developments, including a financial
crunch in sync with the global economic ills, Bangladesh Bank high-ups Thursday
met with all leading banks with an agenda of using the secondary yield curve. The
banks having bigger holdings like Sonali Bank, BRAC Bank, and other leading
banks attended the meeting. The BB wants the banks should have immediately used
it for their asset prices and other benchmarks. The bankers argue that they want to
begin using it on parallel -primary and secondary yield curves. But they also
pledged to switch over to using the secondary-market yield curve two or three
months later.