How long Bangladesh survive with 39 billion USD FC Reserve?

Md. Badrul Millat Ibne Hannan: Recently Bangladesh Petroleum Corporation (BPC) has increased the fuel price 51.68 percent. The process of fuel price increase in Bangladesh is that the BPC has to propose firstly for the increase of price to the Energy Regulatory Commission (ERC). The ERC has to arrange a public hearing. Then what the price would be fixed through public hearing.

According to the Bangladesh Energy Regulatory Commission Act-2003, section 34 (1) of the BERC Act, notwithstanding anything contained in any other law for the time being in force, the price of power generation in wholesale, bulk and retail, and the supply of energy at the level of end-user, shall be determined in accordance with the policy and methodology made by the commission in consultation with the government.

Section 34 (4) further states that the commission shall “determine tariff after giving hearing to licensees and others who have interest in it”. The punishment for violating the law as per Section 42 includes three years’ imprisonment or a fine of Tk 5,000.

Now the question is the price of fuel was a mandatory? In the last seven years, the Bangladesh Petroleum Corporation (BPC) made a huge profit without any price cut though fuel prices fell in the international market.

The authorities are making fuel gains from two sides. They are collecting 30%-32% duty on fuel oil. Besides, the BPC profited for a long time as it did not lower the prices despite the global market fall.

What the process of the increase of fuel price Bangladesh follows
According to GlobalPetrolPrices.com there are three types of process fixing fuel price-

1. Market-determined retail fuel prices:
This pricing type is typical for liberalized fuel markets. In countries with such markets the state intervention is limited to establishing terms and conditions that promote market transparency and free competition. Fuel retailers set their selling prices freely without major restrictions. Therefore, the fuel prices at different stations and in different regions of the country could vary.

2. Price ceiling:
Under this form of price regulation, fuel retailers are also free to determine their selling prices as long as they do not exceed the specified ceiling. The government influences retail fuel prices by setting maximum prices for petroleum products, which are revised regularly. The purpose of this form of price control is to protect consumers from sudden upward price fluctuations or unreasonably high market prices.

03. Fixed price:
The most extreme form of price control is when the government or another authorized institution fixes the retail fuel prices. All retailers must sell their fuels at exactly these prices and what is the price is in international market but price of fuel in the country is constant.

But it is the matter of concern that Bangladesh follows the last one. Fuel price is not today’s topic but there is a relationship between Inflation and Economic Growth of country.

An increase in inflation means that prices have risen. With an increase in inflation, there is a decline in the purchasing power of money, which reduces consumption and therefore GDP decreases. High inflation can make investments less desirable, since it creates uncertainty for the future and it can also affect the balance of payments because exports become more expensive. As a result, GDP is decreases further. So, it appears that GDP is negatively related to inflation. However, there are studies indicating that there may also be a positive relationship. The Phillips curve, for example, shows that high inflation is consistent with low rates of unemployment, implying that there is a positive impact on economic growth.

At present, Bangladesh’s economy is projected to grow 6.9 per cent in fiscal year 2022-23 according to the World Bank (WB).

In our country, World Bank’s projection about Economic Growth Rate is lower than the projection of Bangladesh Bank and Economists of the country.

According to Forrest Cookson who is a consultant for the Bangladesh Bureau of Statistics, stated his assumption for the fiscal year of 20021/2022, 2022/20223, 2023/2024 of Balance of Payment with 7% percent growth in Dhaka Tribune, May, 2022.

Mr. Cookson is also known a well-wisher of the Government. His assumption is more reliable. But it is a matter of concern that Bangladesh will face a severe Foreign Currency Reserve shortage in the year of 2023 and 2023. Let’s analyze the Cookson’s article, where he showed two table- Table 1C-

Source: 2018/2019 and 2019/2020 Bangladesh Bank, 2021/2022, 2022/2023 and 2023/2024 Cookson’s forecast.
Notes: Assume 7.25% growth for 2022/2023 & 2023/2024
1/ Goods and Services
2/ Mostly remittances (net)
3/ Capital inflows (net) + errors and omissions.

From the table we see that the Exports was USD 46.8b and Imports was USD 65.7b in 2018/2019. Here we see that Imports was 28.77% more than Exports. In 2019/2020 Exports was 45.6b USD and Imports was 71.0b USD. In this year Imports was 35.77 % more than Exports. In 2021/2022 Imports was higher than 35.11% and it would be 37.97 % and 37.93% higher than the Exports in FY 2022/2023 and 2023/2024 respectively.

Here Primary Income means- Income receipts refer to employee compensation paid to resident workers working abroad and investment income (receipts on direct investment, portfolio investment, other investments, and receipts on reserve assets). Income derived from the use of intangible assets is excluded. From the FY 2018/2019 to 2023/2024 is always negative. Here negative Primary Income means we get the remittance form our respect Expatriates less but the Foreigners who work in our Country and send remittance from our Country through legal banking channel more.

Secondary Income means- Net current transfers are recorded in the balance of payments whenever an economy provides or receives goods, services, income, or financial items without a quid pro quo. All transfers not considered to be capital are current. Where secondary Income is always positive from FY 2018/2018 to 2023/2024.

Current Accounts calculation formula- The current account is an important indicator of an economy’s health. It is defined as the sum of the balance of trade (goods and services exports minus imports), net income from abroad, and net current transfers. Here, USD {46.8+(3.0)+16.9-65.7}= -5b USD and -3.4b USD which was negative for the FY-2018/2019, 2020/2021 and from the table it shows that it would be negative following FY 2021/2022 upto projected FY 2023/2024 -18.8b USD ,-28.8b USD and -31.7b USD respectively.

Capital Account and Errors, Omissions means Foreign Direct Investment (FDI) plus Foreign Loans and Grants which is actually disburse which shows always positive for our Country.

Error and Omissions usually occur in accounting systems
Our concern about overall balance which is actually meant Foreign Currency Reserve of the Country.

Here overall balance equals (Capital Accounts + Errors and Omissions) minus Current Accounts. If we go through the Mr. Forrest Cookson’s Table, we will find 0.2b USD (5.2-.5.0) overall balance in FY 2018/2019 and for FY 2019/2020 (13.2-3.4)=9.8b USD which was taken from Bangladesh Bank Data was positive balance of overall Foreign Currency Reserve for those two year. From FY 2021/2022 to projected FY 2023/2024 Foreign Currency Reserve will stand -4.3b, -2.8b and -12.7b USD respective FY 2021/2022, 2022/2023 and 2023/2024 which are negative. This is our main concern. If we subtract these negative overall foreign currency reserve from present balance of reserve, it will stand {39.0-4.3-12.8-12.7- (2.7+3.28+4.02)} 0.80b USD that indicates we will possess only 0.80b USD for FY-2024/2025 Foreign Currency Reserve to meet the Balance of Paymen

USD (2.7+3.28+4.02) billion is the foreign loan repayment from FY 2022/2023 to FY 2024/2025 (Source-New Age, May 29,2022 through ERD, GoB)

Any country having three Months foreign currency reserve to settle the Balance of Payment indicates good stability. In May 2022 Bangladesh needed 6.74b USD for to pay Imports Payment. (Source-bdnews24.com, July 12,2022) which was 2% less precedent months. It was possible after declaration of Premiere to reduce the Import of Luxurious Product and it will be reduced probably from 7.0b to 6.0b USD meeting for monthly Imports Payment. Thus, we will require (3×6) 18.0b USD for the first quarter of FY-2024/2025 against possessing 0.80b USD foreign currency reserve.

Though there is a contradiction about usable Foreign Currency Reserve. According to Prothom alo, usable foreign currency reserve is 31b USD. So, it will be more difficult for us having less than one year to meet the Balance of Payment.

How we can recover such upcoming crisis
We must consider Nostro Account Balance into present reserve and initiate a formula with a good combination of IMF’s External Balance of Assessment EBA formula. Payment of instruments can be placed over Nostro Account bearing banks instead of Asian Clearing House (ACU). Imports payment can be met through other currencies like-Dinar, Riyal, other countries dollars which has been followed by India recently (Source-Prothom Alo, dated- August 08,2022). Engagement must be accelerated with those countries having huge trade deficit and offering them to settle imports payment through local currency or other products.

Reduction of Luxuries products imports should be discouraged. Unnecessary project without reliable feasibility study must be stopped now. Ease of the export of manpower to abroad. Searching of New Market Place for expatriates. Legalization and easiness of Gold in legal way. Although laundered money back is not a easy task but utmost attempt must be taken so that no one can never more think for money laundering. Govt should avoid biased and oiling Advisors, Consultants and Economists and seek suggestions with advices from wiser, well-wisher, patriot neutral persons.

The writer is a Banker and Analyst.