Central bank’s USD investment plunges

Bangladesh Bank's foreign exchange reserves invested in US dollars declined 34 per cent year-on-year to $23.63 billion in February as the country is heavily dependent on the American greenback to settle payments for global trade.

The central bank had 73 per cent of its foreign exchange reserves invested in the US dollar as of February 22, data from the BB showed. Forex reserves totalled $32.44 billion on the day.

The forex reserves denominated in the US currency have been falling for two years owing to escalated import payments against moderate export and remittance receipts.

Bangladesh has been facing an acute dollar shortage since the beginning of 2021 after the global economy started to recover from the business slowdown emanating from the coronavirus pandemic.

The stress on the country's foreign exchange reserves deepened after the Russia-Ukraine war broke out in February last year as global commodity prices surged.

A number of businesses and some of their associations have already demanded the central bank take measures to reduce the country's dependency on the dollar.

The central bank invested 5.22 per cent of its forex reserves in the euro, 4.9 per cent in the British pound, 1.9 per cent in the Australian dollar, and 1.6 per cent in the Canadian dollar.

Globally, central banks aren't holding the greenback in their reserves to the extent that they once did. So, the dollar's share of global foreign-exchange reserves fell below 59 per cent in the final quarter of last year, extending a two-decade decline, according to the International Monetary Fund. The share was 71 per cent in 2000.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said: "Now is the time to decrease the over-reliance on the US dollar to protect the interest of the economy."

"Although it will take years to reduce the dependency on the US dollar, we should start the process. We should keep in mind that China and India have already become economic powers, and they may be stronger in the years to come," he said.

The two countries are also the major trade partners of Bangladesh.

Swap can be considered a good option for the country to settle bilateral trade with countries that will also help Bangladesh reduce its dependency on the dollar.

A currency swap line is an agreement between two central banks to exchange currencies. It allows a central bank to obtain foreign currency liquidity from the central bank that issues it – usually because they need to provide this to domestic commercial banks.

For example, the swap line with the US Federal Reserve System enables the European Central Bank to receive US dollars from the US central bank in exchange for an equivalent amount of euros.

The BB has been selling a hefty amount of dollars since 2021-22 to help banks clear import bills, reducing its investments denominated in the American currency.

The central bank has sold around $9.8 billion this fiscal year so far. It injected $7.62 billion in the last financial year.

As a result, forex reserves decreased by nearly 30 per cent year-on-year to $32.44 billion on February 22, BB data showed.

Zahid Hussain, a former lead economist of the World Bank's Dhaka office, says that the US dollar is still the most stable currency in the globe.

"So, it is logical to invest the country's major amount of forex reserves there. If we had more investments in other currencies during the current global economic turmoil, we might have faced a remarkable loss as the US dollar appreciated against all of the currencies."

"If our bilateral and regional trade does not increase, it will not be feasible for us to increase our investment in respective currencies."

Raising investments in other currencies might not possible for Bangladesh as well as most countries overnight as the US dollar is overwhelmingly the world's most frequently used currency in global trade.

Between 1999 and 2019, the dollar accounted for 96 per cent of trade invoicing in the Americas, 74 per cent in the Asia-Pacific region, and 79 per cent in the rest of the world. The only exception is Europe, where the euro is dominant, according to the website of the Federal Reserve of the US.

Md Mezbaul Haque, the spokesperson of the central bank, says that the central bank usually invests its forex reserves in a particular currency when Bangladesh would have to pay an installment of a loan to a foreign nation.

Sometimes, the BB holds a reserve of a foreign currency when the particular nation provides a loan or assistance, he said.

"The world is still dominated by the US currency. So, there is no scope to reduce the central bank's investment in the currency to a large extent at the moment," Haque said.