Forex News Bd – Bank of Bengal’s US dollar-denominated foreign exchange reserves fell 34 percent to $23.63 billion in February as the country relies on the dollar to pay for global transactions.
The central bank had 73% of its foreign exchange reserves in US dollars as of February 22, BB data showed. On that day, foreign exchange reserves were 32.44 billion dollars.
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Foreign exchange reserves in U.S. dollars declined for two years due to rising import costs relative to simple export receipts and remittances.
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Bengal has faced a shortage of dollars since early 2021 as the global economy began to recover from a trade slowdown caused by the coronavirus pandemic.
The pressure on the country’s foreign exchange reserves deepened after the Russia-Ukraine war erupted last February as global commodity prices rose.
A number of businesses and some of their associations have already called for the central bank to take measures to reduce the country’s dependence on the dollar.
The central bank invests 5.22% of its foreign exchange reserves in the euro, 4.9% in the British pound, 1.9% in the Australian dollar, and 1.6% in the Canadian dollar.
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Globally, central banks are not holding as much dollars in their reserves as they used to. The dollar’s share of global foreign exchange reserves fell from 59 percent in the final quarter of last year, a two-year low, according to the International Monetary Fund. This share was 71% in 2000.
“Now is the time to reduce reliance on the US dollar to protect economic interests,” said Ahsan H Mansur, executive director of the Bengal Institute of Policy Studies.
He added: “Although it will take several years to reduce our dependence on the US dollar, we must begin the process.” “We must not forget that China and India are already economic powers, and they may become even stronger in the coming years.” .
The swap can be seen as a good option to settle bilateral trade with countries that will help the country reduce its dependence on the dollar.
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A swap line is a currency exchange agreement between two central banks. It allows central banks to obtain foreign exchange liquidity from central bank issuance, as they have to supply it to domestic commercial banks.
For example, a swap line with the Federal Reserve System allows the European Central Bank to receive US dollars from the US central bank in exchange for the same amount of euros.
BB has sold a large amount of dollars from 2021-22, helping the bank clear import bills and reducing its exposure to the US currency.
The central bank has sold about $9.8 billion so far this fiscal year. It injected $7.62 billion last fiscal year.
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As a result, foreign exchange reserves fell nearly 30 percent year-on-year to $32.44 billion, BB data showed.
Zahid Hussain, former chief economist of the World Bank’s Dhaka office, said the US dollar is still the most stable currency in the world.
“So, it makes sense to invest the bulk of the country’s foreign exchange reserves there. “If we invest more in other currencies during the current global economic turmoil, we may face significant losses when the US dollar rises against all currencies.”
“If our bilateral and regional trade does not increase, we cannot increase our investment in our own currency.”
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Increasing investment in other currencies may not be possible overnight for Bengal as well as for many countries, as the US dollar is the world’s most used currency in global trade.
Between 1999 and 2019, it accounted for 96% of business transactions in the Americas, 74% in the Asia-Pacific region, and 79% globally. The only exception is Europe based on the euro, according to the Federal Reserve’s website.
Central Bank spokesman Md Mezbaul Haque said that when Bengal needs to repay foreign loans in installments, the central bank usually invests its foreign exchange reserves in certain currencies.
He said that at times, when certain countries provide loans or grants, BB holds foreign currency reserves.
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“The world is still dominated by the US dollar,” Huck said. Therefore, there is no scope for the central bank to significantly reduce its investment in money at this time. According to HSBC Global Research, Bengal should attract more attention from investors given its economic potential, but the country is challenged by bad debt, an uncertain stock market, exchange rate volatility and an unstable political situation.
The global research wing of London-based integrated banking and financial services group HSBC Holdings PLC yesterday released a report on Bengal as the ‘Flying Dutchman’.
Report It is true that the stock market in Bengal is small and uncertain.
“But like what happened in India 20 years ago or Vietnam a decade ago, it [Bengal’s stock market] offers the prospect of long-term capital appreciation driven by earnings growth.”
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The country’s GDP growth averaged 6.4 percent over the past decade, faster than much of Asia, and GDP per capita recently surpassed that of India, the report said.
One of the most surprising predictions for Bengal is that it is on track to become a major consumer market by 2030, ahead of Vietnam and the Philippines, according to HSBC.
Moreover, it has come from the country’s growing foreign investment, not just from apparel manufacturers, but also from Indian conglomerates, global tech tycoons such as Samsung Electronics, and Chinese companies.
Another boon for the country is that its private sector revenue is expected to grow by around 20% over the next three years.
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However, risks include rising inflation and existing pricing mechanisms in stocks, which weaken investor confidence, and exchange rate volatility and an unstable political situation are also concerns.
With more than 50% of its population under 25, Bengal needs to invest in education that better equips people for technology-intensive jobs so they don’t focus on low-tech garment jobs, HSBC points out.
But HSBC said in its latest report that the stock’s underlying price was the main selling point in the market and was one of the reasons for its recent underperformance.
“The price discovery process and turnover are the main risks for Bengal stocks,” he said.
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The Securities and Exchange Board of Bengal has introduced a price floor mechanism for the first time in March 2020 and for the second time in July 2021, aiming to stop the free fall of market indices.
When a price floor is restricted, the price does not fall below a certain level, which prevents price discovery and undermines investor confidence. So, it’s no surprise that trading volumes have fallen significantly from their 2021 highs.
But market capitalization was just 19% of GDP, down from 41% in 2010, HSBC said.
“Yes, the market is small, liquid and not so easy to access, but so was Vietnam five years ago,” he added. “Both markets were the same size until 2015, but Vietnam is now four times bigger than before.”
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Interestingly, Bengal has less relevance to global macro and equity themes than Vietnam, and is less likely to attract analysts, providing opportunities for fund managers looking for diversification and “hidden gems”.
Another factor blocking the market, according to HSBC Global Research, is that several companies have raised USD 96 million in IPOs in Bengal since 2020.
The banking industry is currently facing a double whammy of slow deposits and credit growth.
“But looking beyond that, we expect credit growth to pick up, driven by infrastructure spending by banks, investment in the energy sector and capital spending by companies setting up manufacturing units,” HSBC said.
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Bengal is expected to become the ninth largest consumer market by 2030, ahead of Germany and the UK, driven primarily by demographic gains.
Against this backdrop, the report says, investments in areas such as health, education and skills can make the most of this “job opportunity window”.
Decades of high inflation and volatile food and energy prices have been the main drag on Bengal’s economy, with increased exports and foreign direct investment, along with the growth of the export value chain, the main growth catalysts.
In addition, HSBC.DHAKA added July 19 (NNN-BSS) that Bengal yesterday adopted a series of austerity measures to curb fuel consumption, making it a favorite destination for many labor-intensive manufacturers given its cheap labor and strategic location in Asia. It will import with immediate effect and try to reduce foreign exchange pressure
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