Bangladesh fumbles in bid to avert crisis
By Syed Tashfin Chowdhury

DHAKA - Stop-gap measures by the Bangladesh government to stave off economic crisis look increasingly fragile, with foreign currency reserves declining again last month, reversing a brief recovery in January after restrictions were placed on imports.

The foreign currency reserve fell to US$9.15 billion this week, nearly back down to the $9.11 billion recorded in early January before a government request led to banks not opening letters of credit for imports, effectively crimping an outflow of funds. Reserves, contrary to a long-term trend, climbed to $10.2 billion following the curb on imports, which dropped 27% in January compared with a year earlier. Higher remittances from overseas workers also helped boost the reserves.

The import curb was only the latest quick-fix by the government of Prime Minister Sheikh Hasina to bolster an economy crippled by

 

power cuts that prevent exporters, particularly garment manufacturers, using their factories to full capacity.

An earlier decision to encourage industrialists to use rented power plants to meet the 5,550 MW demand for power when only 4,875 MW are generated is driving up bills for imported fuel, exacerbating the drain on foreign reserves. Power Secretary Abul Kalam Azad this week said the shortfall in electricity this summer will be more than 1,000 MW.

The resulting increased use of oil doubled the country's fuel import bill to US$4.48 billion in the year to last June from between $2 billion and $2.5 billion in the previous 12-month period. The fuel import cost is forecast to about 50% to $6.78 billion in the fiscal year that ends on June 30. Longer-term moves, such as letting overseas companies have easier access to exploration and sale of domestic oil and gas resources, have yet to have much impact on supply.

The government last month secured an increase to $2.5 billion, up from $1.5 billion, in the credit limit for Bangladesh Petroleum Corp (BPC) with the Islamic Trade Finance Corporation (ITFC), the trade financing window of Islamic Development Bank, to help the state-owned oil company to pay for fuel imports.

BPC turned to the ITFC as the corporation already owes state-owned banks in Bangladesh around $2.08 billion for importing fuel and the banks did not open letters of credit in January and February for oil imports. BPC also owes $200 million to foreign banks and has deferred payment of some fuel import bills by six to eight months.

With the increased ITFC credit secured, Bangladesh's state-owned banks will now again open letters of credit, but about $500 million being provided by the ITFC is under "special arrangements" and will have to be repaid in nine months.

Officials of state-owned banks, at a February 28 meeting with central bank governor Atiur Rahman and Finance Minister Abul Maal Abdul Muhith, said BPC should pay the banks in local currency, inform the banks at least two weeks prior to its debt repayments as to when these would be made, and, in the case of a scarcity of foreign currency, the central bank will supply foreign currency.

The conditions will not sit well with the International Monetary Fund (IMF), which has advised the central bank not to provide dollar support to nationalized banks for fuel import, Zaid Bakht, Research Director of Bangladesh Institute of Development Studies (BIDS), told Asia Times Online.

A further drain on foreign reserves is expected following an agreement under which Bangladesh will buy 250 MW power from India from July 2013. The purchase deal was signed between Bangladesh Power Development Board and India's Vidyut Vyapar Nigam Ltd, a subsidiary of National Thermal Power Corp, in New Delhi on February 28.

An additional 250 MW power will be "directly procured through competitive bidding" from Indian market, Bangladesh's power secretary, Abul Kalam Azad, said on March 6.

The IMF last month also urged Bangladesh to reduce oil import subsidy and move fast on a new VAT law, in order to avail a $1 billion credit from the Washington-based organization, he said.

For this reason, the government will need to increase fuel prices again, Bakht said. Still-subsidized fuel rates were increased four times last year, helping to maintain persistent inflation, which is now running at 12%.

Bangladesh's foreign currency reserves fell back below $10 billion this month after payment of $893 million to the Asian Clearing Union on March 6. Similar payments are scheduled every two months.

In the other direction, Bangladeshis working overseas sent home about US$1.14 billion in February, 14% more than a year earlier. Remittances in January were up 24.6% to $1.21 billion compared with 12 months earlier.

Bangladesh is having to pay more for imported fuel due to the decline in value of its currency, the taka and higher global oil prices. The taka has lost around 10% against the US dollar in the past six months in spite of strengthening to 81.60 against the dollar on March 5 from around 87 takas to the dollar on January 29. Meanwhile the global price of oil has surged from below US$100 a barrel early last October to over $125.

Bangladesh expects "around $7 billion to $9 billion" of investments in its power sector from private Indian companies, from a total investment of nearly $30 billion in the sector, over the next five to six years, Power Secretary Azad was quoted by the Daily Economic Times of India as saying during a recent visit to New Delhi.

Syed Tashfin Chowdhury is the Editor of Xtra, the weekend magazine of New Age, in Bangladesh.

(Copyright 2012 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)