Wednesday, 6 July, 2022

Foreign Exchange Reserves Need to Be High

  • Dr. SM Jahangir Alam
  • 23rd May, 2022 05:00:42 PM
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Foreign Exchange Reserves Need to Be High


If you have enough foreign exchange reserves, you do not have to worry about getting a foreign loan and you can easily get a loan. Besides, many businessmen also took loans from foreign banks. That too has to be paid in foreign currency. All that is imported has to be paid in foreign currency. For that, any country needs to have sufficient foreign exchange reserves, so that they do no need to worry about imports. In a country like Bangladesh, imports are more than exports. As a result, there is a need to have more foreign exchange reserves. Imports are executed by opening LCs in commercial banks. The importer receives foreign exchange from the reserves of Bangladesh Bank by paying the amount of foreign currency required for import. In other words, if any person, organisation or government takes foreign currency from Bangladesh Bank for any legitimate reason, he has to pay the same amount of domestic currency. On the other hand, if someone deposits foreign currency, he will get domestic currency of equal value. Bangladesh Bank's foreign exchange reserves may be used to meet the demand for local currency for internal development - this idea is not correct. Since the local currency has already been paid to the customers once against the reserve, there will be imbalance in the balance sheet of Bangladesh Bank if the new money is printed and supplied against the reserve again. In that case, the new liability will exceed the real liability. Moreover, it will have a negative impact on money supply, foreign exchange rates and inflation. If there is sufficient amount of foreign currency, loan can be given to government, any country or business organisation at interest. However, it has to be returned in foreign currency. Then it will be profitable and there is no possibility of any negative impact.

India signed the first 1 billion loan agreement in 2010 to develop Bangladesh's communications infrastructure for integration. After that, India signed a 600 million loan agreement with Bangladesh in three more phases. Of this, India has sanctioned about 140 million for the Padma Bridge. India has given this loan money to Bangladesh step by step, which is still going on. India must not have printed dollars on machines and given them to Bangladesh, but from their foreign exchange reserves. There are many risks involved in spending central bank reserve dollars on development projects. If the government needs foreign exchange for the internal development of the country, it can use it with a loan from the central bank. For example, this loan can be used for importing goods. But if the government needs domestic currency for the internal development of the country, such as the construction of dams and roads across the country, a 10 billion loan for training and employment of the unemployed, the central bank is asked to pay the equivalent of 10 billion! Because it shows that there has been no change in the dollar as a reserve, but against the 10 billion, the domestic currency has been given twice - the first time to the actual recipients and the second time to the government as a loan. This will upset the balance of the bank and will lead to inflation in the country.

It is possible to take a local currency loan directly from the bank without much hassle or deception. The government is already borrowing money from commercial banks at high interest rates for internal development projects. However, despite the risks, many are advising to invest the remaining reserve dollar in development projects, leaving money for six months of imports. Meanwhile, inaugurating the Bangladesh Infrastructure Development Fund, Prime Minister Sheikh Hasina said, "The remaining money can be invested by keeping money for six months of imports. Investors will be able to take loans from this fund." The fund has been set up to provide government guaranteed loans from the country's reserves for projects undertaken by the government for priority infrastructure development. Under this, a maximum loan of two billion dollars will be given annually and the interest rate will be a maximum of four percent. However, initially government projects in the power and port sectors will be able to take money from this fund. Initially, an agreement has been reached to give a loan of about five and a half thousand crore taka to the Payra Port Authority. If the money taken from the reserves is not properly selected for which project is being given and the money invested is not raised properly, there is a danger of creating a new crisis. The use of such funds has its limitations and any question about its use would make it difficult to obtain short and medium term loans from international donors.

Foreign exchange reserves are an important measure of how strong the foundation of an economy is. Reserve money cannot be used everywhere or in all cases. There are specific rules and regulations for this, which, if not followed strictly, can be dangerous. While there are many benefits to increasing foreign exchange reserves, there are also some downsides or risks. When it comes to foreign currency, on the contrary, the customer has to provide Bangladeshi currency i.e. money. Due to this the money supply in the market increases. That is why there is a lot of inflation. Because those who have new money, they spend that money, the price of goods goes up. That means imports are not growing. It is also important to note that imports of machinery and industrial raw materials have declined. Because low import growth means the economy is stagnating, the pace of trade and commerce is not going as expected. Another risk to reserve growth is money laundering. Hard-earned foreign currency goes out again by buying goods from abroad at higher prices in the tender process or procurement, bribery trade in purchases, and importing goods at exorbitant prices.

Therefore, the use of foreign currency must be appropriate. Otherwise, some people in our economy will take the opportunity to increase reserves. They take this foreign currency abroad through various banking channels, by default through the stock market or through bidding. Foreign exchange reserves are certainly a blessing for us. However, it must be used properly. These reserves should be used in accordance with the rules and regulations while maintaining macroeconomic balance. We may not have this good day. Therefore, Bangladesh should be taken to a new height by taking advantage of the opportunities of foreign exchange as much as possible. For that, corruption and money laundering must be stopped, economic good governance, rule of law and social justice must be established. It should be kept in mind that due to unequal distribution of money, corruption, lack of democracy, war and social and political instability, many countries of the world have become failed states even after being rich in mineral resources and foreign exchange reserves. After going through many ups and downs, Bangladesh today is a role model of development for many countries of the world.

The writer is Director of BSCL

Source: Sun Editorial