June reserves to exceed IMF target. But at what cost?

Bangladesh’s net foreign exchange reserves will surpass the June target of $14.7 billion set by the International Monetary Fund (IMF) for the first time since the multilateral lender approved a $4.7 billion loan package in February last year.

Bangladesh Bank will finalize its net reserve calculation today and the figure is likely to be $15 billion in line with the international threshold of three months of potential imports.

The net reserve is calculated by excluding short-term liabilities from the gross reserve according to the IMF formula based on the Balance of Payments and International Investment Position Manual (BPM6).

That represents cash from gross reserves, which are expected to rise to $22 billion by the end of June, from $19.4 billion on June 26, according to central bank sources.

In April, net reserves fell below the threshold to $12.8 billion from $19.6 billion at the end of June 2023, according to the IMF’s second review report under the loan package.

Meeting the June target boosted inflation

However, Bangladesh’s achievement of the IMF’s June target is coming at the cost of a squeeze on imports that slowed the country’s economic growth while fueling inflation as a result of rising fuel costs.

The Bangladesh Bank Governor in a letter to the IMF acknowledged that the continued compression of imports has slowed down economic activities, while persistently high global commodity prices and continued devaluation of the taka have kept inflation persistently high, placing a burden disproportionately for the poor.

The country’s imports fell by 15.42% in the first nine months of the outgoing fiscal year FY24, according to Bangladesh Bank data.

Additionally, credit inflow of $2 billion, of which $1.15 billion from the IMF and $900 million from other sources as budget support, is also helping Bangladesh surpass the IMF’s net reserve target.

In addition, banning dollar sales from reserves is also helping. The Bangladesh Bank stopped selling dollars from its foreign reserves from May 8 after introducing a new drag mechanism that raised the price of the dollar from Tk110 to Tk117 in a single day, the biggest devaluation of the taka in the country’s history.

Restriction of fuel imports

The controlled sale of dollars by the central bank is also causing delay in foreign payments forcing the Bangladesh Petroleum Corporation (BPC) to reduce fuel imports.

Bangladesh Bank data shows that oil import registered a negative growth of 8% in July-March of FY24, which grew by 16% in the same period last year.

Negative FDI growth

Bangladesh Bank’s dollar-saving stance has also put many foreign companies in trouble as they could not repatriate their earnings. As a result, they are reinvesting their profits instead of bringing in new investments causing negative growth in Foreign Direct Investment (FDI).

Besides, many other foreign listed companies are declaring low dividends as they could not repatriate their profits back home.

For example, the cash dividend payment of ten multinational companies (MNCs) in Bangladesh fell by 31% in 2023 compared to the previous year, as they faced difficulties in foreign currency transactions for sending money to foreign shareholders.

Because of this, Grameenphone – Bangladesh’s largest mobile operator – also declared a 125% cash dividend to its shareholders for 2023, the lowest since 2010.

BAT Bangladesh also halved its cash dividend to 100% by 2023, marking the lowest rate in more than a decade.

How the WB calculated the $27.15 billion reserve

Md Mezbaul Haque, executive director and spokesperson of Bangladesh Bank, shared with the media a provisional gross reserve figure of $27.15 billion on June 27.

He claimed that the reserves increased with the influx of $2 billion in loans from the IMF and other sources including Korea, the IDB and the IBRD.

However, the figure is inflated as it is calculated on an old formula, BPM5, abandoned a decade ago, and the Bangladesh Bank has adopted a new BPM6 method since June.

Under BPM6, the gross reserve will be $22 billion.

According to the IMF formula, each country will follow two calculations – gross and net reserve. The IMF also provided the gross and net reserve calculation component when it introduced BPM6 in 2012.

Bangladesh Bank ignored the new calculation for 11 years and published inflated gross reserves. Later, in 2023, the Bangladesh Bank approved the new calculation to meet the condition of the $4.7 billion loan package. After the new calculation, Bangladesh Bank had to exclude $7 billion from gross reserves.

However, even after approving the new calculation, the central bank still shared the inflated reserve figure of $27.15 billion.