On reserves

Posted in economics by jrahman on December 21, 2011

This post tries to answer the questions Tacit asked about reserves.

The chart below shows the ratio of reserves-to-imports — or the number of months of imports the stock of reserves would cover.  The IMF’s rule-of-thumb considers a country to be reasonably safe it has reserves to cover three months of imports.  The chart shows that Bangladesh has enough reserves by this metric.









As can be seen in the chart and (noted by Tacit earlier), reserves shot up in 2009.  Why?

The stock of reserve changes if there is a significant change in the demand and supply in the foreign currency market, and the exchange rate is held fixed.  Specifically, if people demand more taka and less foreign currency (which will be the case if exports/remittances/foreign investment inflows rise, or imports fall), then taka will face appreciation pressures.  The central bank can prevent this appreciation by buying the foreign currency and putting it in reserve.  From late 2008 into late 2009, our import bill fell sharply as the global financial crisis resulted in dramatic falls in commodity prices.  Plus, from mid-2009, emerging market currencies saw strong appreciation pressures against the US dollar.  Since taka is effectively pegged against the dollar, the improvement in trade balance resulted in sharp rise in reserves.

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  1. tacit said, on December 22, 2011 at 3:07 am

    Very illuminating. Thanks.

  2. shamshir said, on December 22, 2011 at 3:47 am

    How are we to read the trending towards 2008 levels then?

    • jrahman said, on December 22, 2011 at 9:01 am

      The simplest reading would be that Bangladesh Bank has sufficient reserve to avoid an imminent crisis. I’m trying to figure out whether there are early warning signs for a crisis — watch this space.

  3. shamshir said, on December 22, 2011 at 10:04 pm

    But why is it trending downwards?

    • jrahman said, on December 23, 2011 at 5:24 am

      The detailed balance of payments data are not available yet for the three latest month, so hard to tell anything conclusively. My guess would be that imports of fuel products have gone up sharply.

  4. It’s getting hot in here « Mukti said, on March 3, 2012 at 5:42 pm

    […] Will we have enough reserves? […]

  5. Wiggly party? « Mukti said, on May 5, 2012 at 6:44 am

    […] According to the ADB, the current account is expected to move from a surplus of 0.9% of GDP in 2010-11 to a deficit of 0.5% of GDP in 2011-12 to a bigger deficit of 1% of GDP in 2012-13.  Is this a cause for concern?  Let me echo what I said about the current account two months ago: If the country can avoid running up a large current account deficit, at least it will be spared a run on its currency.  But can we avoid a larger current account deficit than what the ADB is projecting? What if oil prices rise sharply? What if the remittances dwindle? What if there is contagion from the rupee? What if, a la Krugman, there is speculative attack without any fundamental reason?  Will we have enough reserves? […]

  6. […] import slodown and strong remittance growth.  The Bangladesh Bank used the opportunity to build up reserves, which are currently covering 3.6 months of imports (anything over three months is considered […]

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