Friday, 12 August, 2022
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Miscalculation in Forex Reserve Is Not desired At All

Nironjan Roy

Miscalculation in Forex Reserve Is Not desired At All
Nironjan Roy

World politics and economy have been passing through severe turmoil and uncertainty caused by post-pandemic pain and Russia-Ukraine war. Bangladesh is not out of this global trend and the country is scrambling hard to overcome dollar crisis caused by global impact. In order to tackle the situation, the government has been taking restrictive and austerity measures one after another. Under this situation, it is learnt that country’s foreign currency reserve has been overstated by USD 8 billion due to miscalculation and Bangladesh Bank (BB) will have to adjust this overstatement. During this critical situation, depletion of about USD 8 billion from country’s foreign currency reserve due to adjustment of error caused by Bangladesh Bank’s concerned department and identified by IMP (International Monetary Fund), has come as great blow to the govt. This overstatement of reserve has given wrong signal to the govt. because all controlling and austerity measures so far taken, are based on the assumption of country’s foreign currency reserve over USD 40 billion and therefore, outcome is not felt as was expected. Had govt. known the actual reserve position, they must have taken much harder measures because decision based on country’s USD 40 billion reserve is not the same as on the basis of USD 30 billion dollar reserve.  

Miscalculation of foreign currency reserve: It is learnt from local media report that discrepancy arises over the calculation of country’s foreign exchange reserve and therefore, country’s foreign exchange reserve has been overstated by about 8 billion US dollar. This discrepancy has been identified by IMFs (International Monetary Fund) appraisal team who were meeting with senior management of Bangladesh Bank. According to IMF observation, BB has not followed IMF module and guideline while calculating foreign currency reserve, instead they have included some portion of foreign currencies which do not qualify for being part of country’s official reserve. Bangladesh Bank senior management who attended the meeting with IMF, have accepted IMF’s objection and assured them to meticulously follow global standard of foreign exchange reserve set forth in IMF’s Balance of Payment and International Investment Position Manual Sixth Edition (BPM6). According to objection raised by IMF appraisal team, Bangladesh bank while calculating foreign currency reserve, have including some non-reserve assets which include (I) foreign currency loan amounting USD 6198 million outstanding with local banks, (II) deposit with state-owned commercial banks amounting USD 651 million, (III) USD 288 million deposit with International Islamic Trade Finance Corporation of Islamic Development Bank, and (IV) USD 60 million investment in fixed-income securities what is not investment grade. Besides, IMF has also suggested to exclude USD 1 billion because of increasing allocation from USD 7 billion to USD 8 billion to Export Development Fund scheme. All these miscalculations as identified by IMF has allegedly resulted in overstatement of country’s foreign currency reserve by USD 8 billion. If this miscalculation is true, then Bangladesh Bank has never depicted country’s actual foreign currency reserve. So, Bangladesh Bank’s claim of reaching country’s reserve close to 50 billion dollar milestone was not correct and at that time actual reserve was only 40 billion dollar. Similarly, the claim of bringing down country’s reserve to 39 billion dollar is not correct as well and actual foreign currency reserve stands for about 31 billion dollar. Such huge discrepancy at this critical juncture is detrimental to many aspects. Following reserve overstatement, not only the govt. might have taken slow measures but also our reputation may be adversely impacted because international media, thinktank and analysts rate the country and project the country’s potentiality, investment opportunity and growth prospect based on some key fundamental of which foreign currency reserve is one of them. 

Miscalculation give wrong signal: As appears in the media report that during the meeting with IMF appraisal team, BB senior management does not seem to have submitted their rationale, logic and justification of including those non-reserve items in their calculation. Whether IMF will accept BB’ justification and rationale, is a different issue, but BB should have produced their own judgement. Instead, they have silently accepted IMF’s findings and assured them to follow their standard norms in calculating country’s foreign currency reserve. The matter seems to be relevant here because why IMF has raised this issue right now when Bangladesh like many other countries have been struggling hard to face dollar crisis resultant from global financial turmoil. During last few years Bangladesh Bank was reporting significant reserve increase and at one point, BB reserve has reached close of 50 billion dollar milestone. IMF did not raise this issue at that golden period, instead they have projected Bangladesh economy’s prosperous outlook based on the reserve position calculated and reported by Bangladesh Bank. We have previously noticed that there exists relationship in the US hard-currency policy, creation of global dollar crisis, difficulty faced by emerging markets over dollar crisis and IMF’s impetus what is also happening in the current global economic crisis. Although strengthening US dollar is not conducive for current economic situation prevailing in the USA, yet policymakers are pursuing strong dollar policy. Strong dollar policy adversely impacts US export due to price skyrocketing of US goods in the international market. Nevertheless, US policymakers pursue strong dollar policy so that other countries particularly those have outstanding dollar denominated loans fall in trouble and IMF came forward to bail out those troubled countries.

Non-reserve assets and BB’s future strategy: I have not had an opportunity to go through IMF module and guidelines followed in calculating foreign currency reserve but what I understand from IMF’s concern states that only money earned by Bangladesh will qualify for reserve calculation. If this statement holds true then borrowed money, sale proceeds from issuance of bond, any committed portion must not fall under the purview of reserve. Since our university life we have learnt that foreign currency reserve equivalent to three months’ import bill will safeguard the country from the risk of international trade. We have never learnt that import bills cannot be paid from those currencies which are mobilized from different sources and do not qualify for inclusion of reserve. Anyway, it is Bangladesh Bank who knows it better than anybody else. As per IMF’s objection and suggestion, BB will now have to fix this miscalculation and for doing so, some portion of foreign currency must be excluded from reserve calculation. In this situation, Bangladesh Bank may report two components of which one is core reserve calculated as per IMF module while the other is total foreign fund which Bangladesh owns and readily available for investment and meeting international expense including payment of import bill. Since IMF has clearly distinguished between reserve currency and non-reserve currency, BB should develop mechanism and mobilize foreign fund in order to retain as non-reserve assets so that core foreign currency reserve remains intact. In the present situation, IMF has objected and asked BB to exclude USD 6198 million what remains outstanding with local banks. If this amount could be arranged by selling long-term USD bond among expatriate Bangladeshi people, such objection would not have arisen at all and country’s total reserve must have remained intact. In my previous writing, I have emphasized on mobilizing fund by selling long-term bond among expatriate Bangladesh and clearly pointed out that with appropriate measure, Bangladesh can easily mobilize about 126 billion dollar by selling bonds. Unfortunately, BB did not consider taking that initiative. If Bangladesh has this type of buffer fund in their hand, this could be easily used for giving loans to the commercial banks and keeping other forms of non-reserve assets without touching country’s core reserve calculate in conformity with IMF module and guideline. Now that opportunity is over because interest rate is rapidly rising in the developed world, so expatriate Bangladeshis will not be able to manage easy money to invest in bond. However, this is not the last storm, such situation will recur off and on, so BB should start preparing for mobilizing sizable fund by dint of selling long-term bond among expatriate Bangladeshis when normalcy is restored in the developed world. 

Bangladesh Bank is the custodian of country’s foreign currency reserve. They record foreign currency, calculate, retain, invest and reconcile thereof. They have been exclusively following these measures since inception, so they are very familiar and knowledgeable about this practice. Even, they must be very conversant about IMF module and guideline in calculating foreign currency reserve. So, the reason for miscalculation caused by the concerned department of BB is beyond our understanding. The matter must be thoroughly investigated and concerned offices must state the true reason of such miscalculation so that corrective measures can be developed to prevent recurrence of such error in future. Because miscalculation in foreign currency reserve is not desired at all.

 

The writer is a Toronto based Banker, Canada.

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