News Desk: The country’s overall economic management is at risk if the country’s foreign exchange reserves continue to lend to development projects. The country’s top economists, including the International Monetary Fund (IMF) and Bangladesh Bank, have warned the government.
Even then, an agreement was recently signed to provide a loan from the reserve to the Pigeon Port Authority. Orion Group has also applied for a loan from the Reserve. The Bangladesh Independent Power Producers Association (BIPPPA) has offered loans from the reserve to private power projects.
Meanwhile, the IMF has said that lending from the reserves could jeopardize the overall economic management. Bangladesh does not have the ratio of GDP to reserves that it needs to lend from the reserves.
According to a report by Bangladesh Bank, the country’s current reserves are 4 thousand 300 million dollars, but it is not clear whether it is enough to move into a middle-income economy. The level of potential risk needs to be taken into account in the payment of import costs and other liabilities from the reserves. Economists say reserves are kept to deal with urgent needs or risks. Its use is not rational here and there.
On March 15, the government set up the Bangladesh Infrastructure Development Fund (BIDF) to provide loans for development projects from the reserve. From this fund, a target has been set to lend 200 million a year or Tk 17,000 crore in local currency. Bangladesh is the first in the world to form such a fund including South Asia. The Prime Minister has approved the policy of raising funds. It has been sent to Bangladesh Bank. Bangladesh Bank is now working on the policy.
Reserve for emergency needs or risk management, where its use is not reasonable – said the former governor of the central bank. Salehuddin Ahmed. He said the money would go to the market in foreign currency from the central bank outside the commercial banks. On the one hand, the flow of money in the market will increase. Central bank money, on the other hand, is called ‘high powered money’, which will generate more than double the amount of money that comes into the market. This will increase the pressure on inflation. Banks will be deprived of the opportunity to acquire the capacity to finance large projects.
According to a source, the central bank had encouraged the banks to give loans to syndicates or a few banks for disbursement of large sums of money. It used to be widespread but now it is very limited. In development projects, loans could be given in foreign currency through syndication of banks without giving loans in foreign currency from the reserves.
According to the policy, in order to get a loan from this fund, the priority of the government should be the infrastructural development project. On the other hand, the government will be able to get a loan only if it gives a guarantee. The project will have to earn foreign exchange. The project will also provide loans to local and foreign entrepreneurs who will invest in the development of the country’s infrastructure.
In this context, the President of Bangladesh Independent Power Producers Association (BIPPPA) Imran Karim said, “We definitely want the reserve to be financed for better projects in the power and energy sector.” However, in order to maintain discipline in the use of this money, it must be strictly monitored. The process by which entrepreneurs get the money, so that it is very strong. The process has to be done so that the money is taken from the reserve and returned. Good entrepreneurs have to give loans selectively. This is because the central banks all over the world will keep an eye on lending from big projects and reserves. No problem can be created here.
This means that not only public sector development projects will be given loans from the reserve, but also private and foreign entrepreneurs will be given loans, the concerned said. This will increase the level of risk. If the project fails to repay the loan due to guarantee, it will become a latent liability of the government. If at some point it becomes a direct liability, the government will be under pressure. At the same time the amount of defaulted loans will increase.
So far, five funds, including BIDF, have been set up with funds from the central bank’s reserves. All funds have a certain size. But BIDF has no permanent size. It has just been said that a loan of 200 million a year will be given.
Earlier, four funds were set up with foreign currency from the central bank’s reserves. These are-200 million in funding, 20 million fund, 500 million Export Development Fund (EDF) and Investment Promotion and Financing Facility (IPFF)A fund of 42 million. All the foreign exchange of the first four funds has been provided by the Central Bank.
Bangladesh Bank has provided 60 million of the last fund from the reserve.The World Bank has provided the remaining 36 million. The interest rate of these funds is 1.5 to 4 percent. Earlier, Bangladesh Biman from the reserve 300 crore has been given.
As an argument in favor of taking from the reserves, foreign loans are being taken for the implementation of development projects. The interest rate is high. Donors have to abide by various conditions. Unnecessary shopping is to be done. As a result, costs are rising. If you take an interest loan from the reserve, these additional problems are not happening. The cost will be less. For this reason, loans are being taken from the reserve. At present, the average interest rate for borrowing from abroad is 6 percent. It is being given from the reserve at one and a half to 4 percent interest.
According to the IMF report, the amount of reserves is now sufficient according to the size of the country’s economy. But not extra. If you give loans from the reserve, if they do not come back, the tendency to default will increase. The amount of defaulted loans is already high in the country.
In order to lend directly from the reserves, the ratio of the country’s total GDP and reserves must be very high. In the current financial year, the size of GDP (gross domestic product) has been estimated at 31 lakh 72 thousand crore.The reserve amount was 4,300 crore dollars or 3 lakh 7 thousand crore rupees in local currency. The ratio of reserves to GDP is 9.1. In other words, the foreign exchange reserves are equal to one-ninth of the total GDP. It should go above at least 3 parts. Which is quite difficult to achieve.
Corona has had a positive impact on reserves as investment and imports have declined and remittances have increased. If investment increases, imports will increase. Then the pressure on the reserve will increase.
Foreign investment is discouraged if reserves are low. Their confidence crisis increases. If the reserves are high, the atmosphere of trust is strengthened. At the same time, if the reserves are low, banks do not want to take any LC directly without a third party bank guarantee. If you want to get a third party guarantee, you have to pay commission. The rate ranges from 10 paise to 40 paise. This increases the cost of LC. This increases business costs, which sends a negative message to overseas markets. After the Hallmark scandal, Sonali Bank’s LC was not taking foreign banks directly. Third party guarantees had to be given. The same was the case with Basic Bank. At present this crisis is over.
The country’s foreign exchange reserves now stand at 4.3 billion . According to the IMF’s safe haven, a country must have a reserve equal to at least three months’ worth of import costs. The average monthly cost to meet the country’s import costs is 500 million.As a result, the cost of meeting the import cost for three months is 1,500 crore dollars. As such, it is possible to meet the import cost of 9 months with the current reserves of the country. Considering this, the reserve is risk free. For this reason, the government has given priority to investment from the reserves.
Meanwhile, Bangladesh Bank formed a 10-member committee earlier last month to conduct a survey on lending to government development projects from reserve funds. The process of giving loan from the reserve has already started before the report of the committee.
A central bank official said the central bank would prepare the report on its own. It will take necessary steps by analyzing the level of potential and risk.
There is no precedent in the world for such large-scale lending from the reserves. When the Indian government faced a severe financial crisis in 2018, it borrowed money from the Reserve Bank to cover the expenses of government employees, ignoring the opinion of the country’s central bank, the Reserve Bank of India.
When economic activity stalled due to the corona early last year, the UK’s central bank helped the government raise money flows into the market by borrowing money from the Reserve Bank of England. The central banks of Zimbabwe and Germany took similar steps.
When the US recession hit in 2009, the Obama administration borrowed money from the Federal Reserve Systems, the country’s central bank. The liquidity situation was exacerbated by the financial crisis.
