Govt warned against stacking forex
The buffer foreign exchange reserve may have hit a new high, but the economics experts feel a huge forex may not do any good to the macro-economy and could push inflation if left idle.
The economists have advised the government to use the buffer reserves for investment purposes.
They have suggested the government to make investments in the gas and power sectors since those twin sectors are holding back the pace of industrialisation.
According to the Bangladesh Bank data, the foreign exchange reserves hit a record high of $12.65 billion on Thursday, breaking all past records, because of increased remittances and foreign assistance, low import costs and steady export earnings despite the global slowdown.
The current dollar reserves will be good enough to offset the import costs for the next five months.
The central bank officials said the forex reserve would further increase as the International Monetary Fund (IMF) would release the second instalment of US $141-million aid under its Extended Credit Facility (ECF) to Bangladesh on completion of its review in January.
When Bangladesh Bank Governor Dr Atiur Rahman had taken the office three years back, he had hinted to bring the additional reserves to investment. As the decision is yet to be implemented, the experts are pressing to go for it without any further delay.
Prominent economist and former Governor of Bangladesh Bank Mohammad Farashuddin told, “The government should immediately start a plan to bring the huge amount of foreign exchange reserve to investment instead of preserving it.”
Farashuddin, who headed the central bank during the Awami League’s first stint in power, said that the foreign exchange reserve should be mainly kept in cash for import of food grains and other necessary goods during emergencies and disaster-like situations.
“The government at the moment has food reserve of 1.5 million tonnes. It will not be needed to import food grains in the next one-and-a-half years,” he added.
“There is propaganda in the country that everything is destroyed if the reserve drops. In this perspective, the government might have got self-complacent since the reserve is high.”
He continued: “But there’re some negative aspects if this $12.5-13 billion lies idle. It’s enough to have currency reserves to meet import costs of essential goods and help people survive. Excess currency reserve may fuel inflation.”
Explaining the issue, Farashuddin said the supply of money increases in the market if the central bank conserves foreign currency reserve. When the supply of money increases the prices of the daily essentials rise as well and the inflation also increases, he said.
Analysing the economic situation, he said, “Though the other economic indexes are running well, the picture of investment is very bad. The Finance Minister is also repeatedly mentioning the issue. In this circumstance, I think it’s very much essential to use the reserve to increase investment.”
The former chief of the central bank pointed out that the main hindrances to investment were gas and power crisis and lack of infrastructure development. “For resolution of the problems, I want the reserve used for investment.”
Bangladesh Institute of Development Studies (BIDS) Director (Research) Zaid Bakht also underscored the need for channelling the reserve to investment.
He told “The central bank was interfering in the market to maintain dollar price. As a result, the supply of money is increasing in the market for which the inflation may raise.”
The BIDS official suggested spending the reserve on industrialisation as he referred to lower import of capital machinery and industrial raw materials in recent times.
The Taka is getting stronger because of adequate supply of US dollars in the market, backed by record remittance inflow and declining import demand.
After a year, the value of US dollar against Taka dropped at Tk 80 on Thursday. Despite actively buying in the interbank foreign exchange market, the central bank cannot to ensure that the Taka exchange rate remains pegged against the dollar.
Bangladesh Bank on Thursday bought US$ 57 million against the rate of Tk 80. The central bank has bought some US$ 200 million in the last two weeks.
Money sent home by about eight million citizens abroad is a key source of foreign exchange alongside garment exports, which account for 80 percent of the total export earnings of around $20 billion a year.

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