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190. Forex Reserve of Bangladesh: An Overview of the Country’s Economic Status | Forex BD

Introduction

Bangladesh, a small country located in South Asia, has been experiencing rapid economic growth over the past few years. One of the key indicators of this growth is the country’s foreign exchange reserve, which has increased significantly over the years. In this article, we will discuss what forex reserve is, why it is important, and how Bangladesh has been managing its forex reserve to achieve economic stability.

What is Forex Reserve?

Foreign exchange reserve, commonly known as forex reserve, is a stockpile of foreign currencies, gold, and other valuable assets held by a central bank or monetary authority of a country. It serves as a cushion against economic uncertainties, supports the stability of the national currency, and facilitates international trade and payment transactions.

Importance of Forex Reserve

Forex reserve plays a crucial role in ensuring macroeconomic stability and financial security of a country. It helps to maintain a balance of payment, which is the record of all economic transactions between a country and the rest of the world. A sufficient forex reserve ensures that a country can pay for its imports and debts without relying on external borrowings. It also helps to stabilize the exchange rate of the national currency and protects it from speculative attacks.

Forex Reserve of Bangladesh

Bangladesh Bank, the central bank of Bangladesh, manages the country’s forex reserve. The reserve has been increasing steadily over the past decade, reflecting the country’s growing export earnings, remittances, and foreign investment. As of April 2023, Bangladesh’s forex reserve stands at $56.42 billion, which is a record high for the country.

Factors Contributing to the Growth of Forex Reserve

Several factors have contributed to the growth of Bangladesh’s forex reserve. The following are some of the key factors:

Exports

Bangladesh has been experiencing a steady growth in its export earnings, particularly from the ready-made garment industry, which accounts for over 80% of the country’s total exports. In the fiscal year 2021-22, Bangladesh’s export earnings reached a record high of $48.55 billion, up from $33.67 billion in 2016-17. This has significantly increased the country’s forex reserve.

Remittances

Bangladesh is one of the top remittance-receiving countries in the world, with over 10 million Bangladeshis living and working abroad. In the fiscal year 2021-22, Bangladesh received $23.27 billion in remittances, which is a record high for the country. This has also contributed to the growth of forex reserve.

Foreign Investment

Bangladesh has been attracting foreign investment in various sectors, such as energy, infrastructure, and information technology. In the fiscal year 2020-21, the country received $2.83 billion in foreign direct investment, which is a 5% increase from the previous year. This has also helped to increase the forex reserve.

Management of Forex Reserve

Bangladesh Bank manages the country’s forex reserve through various strategies, such as diversification of assets, hedging against currency risks, and maintaining adequate liquidity. The bank invests the reserve in various foreign currencies, such as US dollar, euro, and Japanese yen, and also in gold and other precious metals. The bank also uses the reserve to intervene in the foreign exchange market to stabilize the exchange rate.

Challenges and Future Prospects

Despite the significant growth in forex reserve, Bangladesh still faces several challenges in maintaining its economic stability. The following are some of the key challenges:

Dependence on a Single Sector

Bangladesh’s economy is heavily dependent on the ready-made garment industry, which accounts for over 80% of the country’s total exports. This over-reliance on a single sector poses a risk to the country’s economic stability, as any downturn in the sector could significantly impact the forex reserve and overall economy.

Balance of Payment

Although Bangladesh’s forex reserve has been increasing, the country still faces a significant balance of payment deficit. The deficit means that the country is importing more goods and services than it is exporting, leading to a drain on the forex reserve. The country needs to address this deficit to maintain its economic stability in the long run.

Exchange Rate Volatility

The exchange rate of Bangladesh’s national currency, the taka, is subject to volatility due to various factors, such as changes in global commodity prices, geopolitical risks, and monetary policies of major economies. This volatility can impact the forex reserve and overall economic stability of the country.

Despite these challenges, Bangladesh’s forex reserve is expected to continue growing in the future, thanks to the country’s efforts to diversify its export basket, attract foreign investment, and improve the overall business climate.

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