Factors Affecting the Foreign Currency Reserves in Bangladesh:An Empirical Study

Abstract

Background: Foreign currency reserves are a crucial determinant of growth and stability in
Bangladesh, where domestic fiscal and monetary policies have offset trade deficits. This study
attempts to examine the macroeconomic factors determining reserve accumulation, focusing on
their significance in preventing vulnerabilities.
Research Questions: Specifically, the study analyzes the key macroeconomic variables (exports,
imports, remittances, external debt, FDI, HDI, GDP, and savings) that have a significant positive
or negative effect on the foreign currency reserve of Bangladesh. What are the key factors that
determine the foreign currency reserve in Bangladesh? What is the direction, magnitude, and
significance of the relationships? And in response to trade deficits and development needs, can
they promote economic stability through reserves as influenced by remittances and imports?
Theoretical context: Foreign currency reserves are the backbone of Bangladesh’s economic
stability, as they mitigate the trade deficit and shocks. Precautionary motive theory captures
reserves accumulation as a hedge against crises, complemented by remittances and FDI.
Methodology: Based on secondary data sourced from the World Bank and UNDP from the year
1990 to 2022, this quantitative research considers foreign currency reserves as the dependent
variable and regresses the independent variables (exports, imports, remittances, external debt, FDI,
savings, HDI, and GDP) using Stata. Analysis includes bivariate and multiple regression, ADF
unit root test, Johansen cointegration, and diagnostic tests for robustness.
Key Findings: Reserves are positively driven by exports, GDP, remittances, and external debt (all
p<0.01), and are depleted by imports, FDI, and HDI (p<0.001). The model explains 97.4%
variance (R²=0.974) and guides the policy for enhancing export growth, curbing imports, and
achieving balanced development.