An Economic Analysis of Bangladesh’s Foreign Exchange Reserves

Focusing on global best practices and local circumstances, this paper offers an economic analysis of issues pertaining to Bangladesh's foreign exchange reserves. Although its reserves are not strikingly higher than what is required, the paper highlights the fact that they are the result of an ‘investment drought' in the country. Like a typical two-handed economist, the author recommends, albeit with a skewed preference for first option, that: a) Bangladesh should expedite its financial sector reform using its reserves as insurance; and b) if it does not intend to markedly disturb its reform equilibrium, the country can channel part of its reserves for alternatives uses as the cost of the reserves build-up is growing following the collapse in interest rates in the United States. In the absence of required managerial know-how, the question of alternative uses of the country's reserves requires further research as it is a trade-off between return and liquidity