Md. Zillur Rahaman

Many of you may know that the financial institutions of any country have to deposit a part of the total money collected from their customers as deposits in the central bank and this is called general reserve. But they cannot spend this money on loans or other activities. It has to be deposited with the central bank as a guarantee. And on the other hand, from the total foreign exchange coming from exports, remittances, loans or other sources, the amount of foreign exchange stored or deposited with the central bank after deducting the foreign exchange going to various sectors such as import, loan and interest payment, education abroad, medical etc.

If there is sufficient foreign currency savings, then there is no need to worry while taking foreign loans and loans are also easily available. Besides, many traders also take loans from foreign banks. That too has to be paid in foreign currency. The price of the imported goods has to be paid in foreign currency. For that any country needs to have enough foreign exchange reserves. As a result, there is no need to worry about imports. Imports are always more than exports in a country like Bangladesh. As a result, in this case, foreign currency reserves need to be more. Imports are carried out by opening LCs with commercial banks. The importer gets foreign currency from the reserves of Bangladesh Bank by paying the amount of foreign currency required for the import.

According to World Bank data, in 1972 our newly independent war-torn foreign exchange reserves, including hoarded gold, were only $270.40 million. However, since 2000, there has been an increasing trend in the foreign exchange reserves of Bangladesh. In 2001-02 the foreign exchange reserve was at $1.50 billion and in 2006-07 the reserve increased to $5 billion. Then the reserve increased to $36 billion in the fiscal year 2019-20 and in August 2021, Bangladesh's reserves rose to $48 billion amid the COVID-19 crisis. So far this is the highest record of Bangladesh reserve. Incidentally, due to the negligence of the previous government, on February 4, 2016, $81 million (Tk 810 crore in Bangladeshi currency) was stolen from Bangladesh's foreign exchange reserves. These dollars were not taken from Bangladesh Bank's account or vault, but rather from Bangladesh's reserve dollars kept in the Federal Reserve Bank of the United States through hacking.

When Bangladesh's foreign exchange reserves reached $48 billion in August 2021 during the COVID-19 pandemic, many breathed a sigh of relief. But because of the short-sighted hawkish decisions of the fascist Hasina government, the foreign exchange reserves dwindled to $18.64 billion last May. After the interim government took over in August last year, various steps were taken to stabilize the foreign exchange market, resulting in the foreign exchange market being quite stable. Due to this, the expatriate income has been dynamic and foreign exchange reserves have also started to increase.

According to central bank data, Bangladesh's foreign exchange reserves have crossed $20 billion after almost two months due to increase in expatriate income. According to the International Monetary Fund (IMF), on 7 November 2024, the country's foreign exchange reserves released $20 billion and it was at $19.87 billion a week ago. Gross reserves rose to $25.72 billion from $25.44 billion a week ago. However, according to the IMF's accounting system, the foreign exchange reserves at the beginning of September this year were at $20.55 billion. According to Bangladesh Bank data, Bangladeshis living and working abroad sent a total of $8.93 billion in remittances during the July-October period of the 2024-25 fiscal year, which is 30 percent higher than the previous year. But it fell below $20 billion after payment of $1.37 billion in July and August import bills through the Asian Clearing Union (ACU).

Bangladesh Bank's sources of foreign exchange income include exports, expatriate income, foreign investment, foreign loans and grants, etc. If for some reason additional local currency is required, it can be printed and supplied by the initiative of Bangladesh Bank, but it is not possible in the case of foreign currency. Foreign exchange must be earned through labor or exports, or can be obtained as loans and grants. A major part of Bangladesh's foreign exchange comes from remittances and the garment industry. In other words, expatriate Bangladeshis and garment workers are contributing the most to foreign exchange earnings. And on the other hand, the major areas of expenditure are import expenses, payment of various types of loans and liabilities and payment of dues of contractors working in various government projects of the country. Foreign currency is also required.

Accepting the IMF's objections to Bangladesh Bank's account of reserves, one thing is clear that the amount Bangladesh Bank has been referring to as the country's reserves, was never the actual reserve. When reserves were claimed to be $48 billion in August 2021, the real reserves were at $40 billion. Bangladesh Bank has invested the reserve money in dollar as well as various bonds, currency and gold abroad. Most money is kept in dollars. Again, funds have been formed in the country in the form of reserves. The Export Development Fund (EDF) was created with $7 billion from reserves. Apart from this, Long Term Fund (LTF), Green Transformation Fund (GTF) have been constituted as reserves. Basically, the IMF has been objecting to these.

Gold reserves were used as the main currency reserves in most countries for many years in the past. Gold was considered an ideal reserve asset, as its value remained unchanged even during the Great Depression. But since the collapse of the Bretton-Woods system in 1971, the price of gold has fallen abnormally. Earlier in 1944, at a conference in Bretton Woods, New Hampshire, USA, currencies in the international market were pegged to gold or the US dollar. Half of all the gold in the world was then owned by the United States. But in 1971, US President Richard Nixon stopped the system of converting assets from US dollars to gold. Since then the US dollar has been the most used foreign currency in current reserves.

Almost all countries in the world, regardless of size, hold significant amounts of foreign exchange reserves. More than half of these reserves are held in the US dollar as it is the most traded currency in the world market. Also British Pound Sterling, Euro and Japanese Yen are among the currencies used in foreign exchange reserves. These foreign exchange reserves are used to pay the debts of any country's own currency and influence monetary policy. Foreign exchange reserves increase the shock resistance and flexibility of the country's economy. Foreign currency reserves are used to hedge market shocks in the event of a rapid devaluation of the domestic currency. Many economists believe that foreign exchange should be held in currencies that are not directly linked to the domestic currency, so that it is easier to prevent shocks. But this is difficult to do in today's era, as all the world's currencies are now highly interconnected. Currently, China has the largest foreign currency reserves in the world. Its amount is equal to $3 trillion. Most of it is denominated in US dollars.

Economists and researchers have repeatedly warned the previous government that a large reserve would help to deal with the ongoing global economic crisis. Brazil and Mexico in 2008-09 are examples of how effective foreign exchange reserves are during major crises. Research has shown that Brazil did well in dealing with the economic crisis at that time, but Mexico failed. Because Brazil had enough reserves to handle the economic shock but Mexico did not. As a result, while Brazil was able to maintain the value of its currency, Mexico's situation was the opposite. In this situation, economists think that the idea of investing money from the reserve is very bad and dangerous, which was done by the previous government. Even now, many people do not know clearly what kind of crisis will come, so it would be wisest to hold on to the reserves instead of using them arbitrarily at the moment.

The writer is a, Banker and Columnist