The Bangladesh Bank board has refrained from making any final decision on the government’s proposal to get loans from the BB’s foreign currency reserve for development projects.
Before making any decision, the central bank would weigh up all the pros and cons of using the reserve for development projects, a senior official of the central bank told New Age on Friday.
Prompted by the prime minister Sheikh Hasina’s instruction and subsequent letter from the finance ministry, the central bank put the issue on the agenda for its board meeting held at the BB headquarters in the capital on July 23 with BB governor Fazle Kabir in the chair.
A recent surge in the country’s foreign exchange reserve helped reach it the $36-billion mark on July 2 this year from $33 billion a month ago.
A steep fall in import payments and steady inflow of remittance earnings were the two reasons for the surge in foreign exchange reserve, experts said.
The BB meeting also discussed the basic principles of managing foreign exchange reserve, the BB official said.
The main objectives in managing a stock of reserves for any developing country includes preserving their long-term value in terms of purchasing power over goods and services, and minimising risk and volatility in returns.
Foreign exchange reserves are held as precautionary and transaction motives, to provide confidence to the markets, both domestic and external, that foreign obligation can always be met.
There is no such example of using foreign exchange reserve for any country’s domestic development project financing.
Neighbouring India had taken such an initiative earlier but backtracked on its decision taking the risk factors into consideration.
Keeping the 1991 financial crisis in mind, India has continued to pile up foreign exchange reserve with a view to tackling any future crisis and attracting foreign investments.
Amid the coronavirus outbreak, India’s reserve exceeded the $500-billion mark for the first time in June this year.
The BB official said that Singapore and China had been utilising their foreign exchange reserves for profit generation but not for development project financing.
The BB meeting also discussed what would happen if the country’s remittance earnings fell and import payments increased in the coming months.
The official said that foreign exchange reserve was not only for anticipated current account deficits but also for liquidity at risk arising from unanticipated capital movements.
Besides, reserve also represents a country’s financial condition to the foreign investors, he said.
He said that the country’s reserve would be under pressure in the coming months with an increase in the government’s external borrowing.
In the fiscal year of 2018-19, the country’s payment against external debts was $1,593.8 million.
The figure has been increasing every year.
If the foreign investors find the country’s reserve dissatisfactory, they would not consider the country for investments even after it ensures all other prerequisites for attaining foreign direct investments, the official said.
Back in 2019, the then finance minister, AMA Muhith, mooted such an idea.
The idea, however, was not put into use amid criticisms that there were risks of waste since the money would be taken for mega projects undertaken mostly on political consideration.
The rising budget deficit and revenue collection shortfall might have instigated the government to take such an initiative.
Revenue collection by the National Board of Revenue stood at Tk 2,18,406 crore in the recently concluded fiscal year 2019-2020, falling Tk 82,094 crore short of the revised target for the year.
Because of the shortfall, the government borrowed more than Tk 85,000 crore from the banking sector in FY20.
For the FY 2020-21, the government has also announced a budget with a hefty deficit, promoting the government to search for money from the very beginning.
Want stories like this in your inbox?
Sign up to exclusive daily email
More Stories from Banking