Foreign Currency Reserves: Challenges for Low-Income Nations in Global Trade

When assessing the long-term economic development and capability of a country, relying solely on GDP size or per capita income often falls short of providing a realistic understanding of its economic health. This is particularly true for low-income and developing nations, where the status of foreign exchange reserves and external debt must be carefully evaluated.

A country cannot be considered sustainable, strong, or on a positive trajectory if its foreign trade (import-export) remains imbalanced over an extended period. Despite some decline in the acceptance of the US dollar as a universal reserve currency, it remains the primary choice for countries to hold as a safe asset.

Bangladesh's Foreign Exchange Reserves: An Overview

Bangladesh, despite ongoing global economic instability, has managed to maintain a gross foreign exchange reserve above $20 billion, thanks to increased remittance inflows and reduced import expenditures. According to a November 21, 2024 update by the Bangladesh Bank, the country's reserve under IMF's BPM-6 methodology stands at $18.494 billion, with a gross reserve of $24.27 billion. For context, at the end of September 2024, reserves were $19.862 billion (net) and $24.863 billion (gross). Earlier in the year, on March 7, 2024, reserves temporarily increased to $21.15 billion under the BPM-6 methodology. However, as a nation with over 170 million people, Bangladesh's reserve should ideally exceed $55 billion, a goal yet to be achieved.

In the case of Bangladesh, despite economic instability, a rise in remittance inflows and a decrease in import expenditures have kept gross foreign reserves above $20 billion. According to the Bangladesh Bank's latest data (as of November 21, 2024), reserves under the IMF BPM-6 methodology stand at $18.494 billion, while gross reserves are $24.27 billion. In comparison, at the end of September, reserves were $19.862 billion (BPM-6) and gross reserves $24.863 billion. Historical data shows that on March 7, 2024, Bangladesh's reserves slightly increased to $21.15 billion. However, for a population of over 170 million, the ideal reserve level should be at least $55 billion, a target Bangladesh has yet to achieve.

India's Reserves: A Regional Benchmark

India, South Asia's largest economy, has shown resilience amid the global economic slowdown and the prolonged Russia-Ukraine war. As of November 29, 2024, the Reserve Bank of India reported a foreign exchange reserve of $658.09 billion, up from $625.63 billion on March 1, 2024. This growth underlines India's ability to maintain robust financial and trade stability.

Despite global economic slowdowns and the prolonged Russia-Ukraine conflict, India has maintained strong economic growth and a steady increase in reserves. On November 29, 2024, India's foreign reserves were $658.09 billion, compared to $625.63 billion on March 1, 2024.

Leading Global Reserve Holders

China retains its position as the top reserve holder globally, with $3.38 trillion as of October 31, 2024. Following China, Japan holds $1.164 trillion, and Switzerland possesses $864.52 billion in reserves. India now ranks fourth globally, cementing its status as a leading reserve holder.

China holds the world's largest reserves at $3.38 trillion (as of October 31, 2024).Japan and Switzerland: Japan and Switzerland rank second and third, with $1.164 trillion and $864.52 billion, respectively.

South Asia: Contrasting Performances

Among South Asian nations, Pakistan remains economically vulnerable, relying heavily on IMF bailout packages and loans from countries like China and Saudi Arabia. As of November 29, 2024, Pakistan's central bank reported reserves of $12.038 billion.

Sri Lanka, after facing a severe economic crisis from 2020 to 2022, has shown notable recovery since mid-2023. By October 2024, its reserves increased to $6.425 billion, compared to just $1.896 billion in December 2022.

Pakistan: Struggling with economic crises, Pakistan's reserves rely heavily on IMF bailout packages and bilateral loans from countries like China and Saudi Arabia. On November 29, 2024, Pakistan's reserves stood at $12.038 billion. Sri Lanka: Recovering from a severe crisis, Sri Lanka's reserves rose to $6.425 billion by October 2024, compared to a low of $1.896 billion at the end of 2022.

Other South Asian nations exhibit varying reserve levels:

Afghanistan: $433 million,Nepal: $18.4 billion ,Bhutan: $927 million,Maldives: $588 million (including gold reserves).

The Path Forward for Low-Income Countries

Considering the ever-changing global economic landscape, low-income nations must focus on prudent use and management of foreign exchange reserves. Sustainable economic development and financial security hinge on creating policies that promote balance, growth, and resilience.#

References..Bangladesh Bank, Reserve Bank of India, Central Bank of Pakistan,Xinhua News, Reuters.