The traditional, and still most commonly-used indicator of 'reserve adequacy' is reserves in months of imports, aka the reserve import cover. It measures the number of months of imports that can be paid for with the foreign exchange reserves available with the central bank of a country at any given point.

According to the IMF, this measure "is likely to remain relevant as a simple way of scaling the level of reserves by the size and openness of the economy."

It is not however the only measure of reserve adequacy - something we'll come back to.

Recently, a downward slide in Bangladesh's reserves has been met with great concern among policymakers and other economic actors. From a peak of $48 billion reached in August 2021 - said to be enough to cover 9 months of import at the time - the reserve slid below $40 billion for the first time in two years earlier this month.

Leave aside for the moment the issue of 'encumbered' and 'unencumbered' reserves - that may leave the figure a further $7-8 billion lower. For now we will proceed with the figure of $39.67 billion, that was reported on July 20.

It is now being said, on behalf of the government, that the reserve is adequate to cover 5 months of imports. Some independent economists however contend the RIC at the moment is 4 months. And one or two are even venturing three months.

More than the reduction in the actual amount, it is the proportionately larger reduction in the reserve import cover from 9 months to 3, 4, or 5 months, that is signalling hard times ahead for most Bangladeshis.

How could an $8 billion downturn in the reserve from August 2021, just one-sixth, lead to almost a halving of the RIC? The key lies in how the reserve import cover is calculated.

Don't be put off by the math. It is actually very simple.

The formula for the reserve import cover = reserve/annual import x 12 (i.e. the reserve figure divided by annual or annualised imports, times 12)

Clearly, the import figure we use is extremely important to our calculation. And it is the dramatic change in the import figure we're using now, as opposed to the one used in August 2021, that is causing our reserve figure to lose even more shine than what is visible on the surface.

It is a direct result of the record breaking annual imports the economy witnessed in the just-concluded fiscal (2021-22). Final figures are officially still not in, but Bangladesh Bank's own estimation, as it released its monetary policy statement for FY23 last June 30, put it at $85 billion - a whopping 40 percent increase from the previous fiscal, 2020-21, when it was $60.7 billion.

In August 2021, it was customary to calculate the RIC using the 2020-21 import figure:

48/60.7 x 12 = 9.4 months.

It is customary to ignore the number after the decimal. So that's how we got the 9 months back then.

Today, we must use the 2021-22 import figure in calculating the RIC:

39.67/85 = 5.6, or 5 months.

More like four?

The 4 months of imports that some economists are quoting, is where we return to the concept of 'unencumbered' reserves.

Most economists, and the IMF institutionally, are of the view that a country should have only its unencumbered foreign liquidity in its reserve calculation, to avoid creating an illusion. 'What cannot be spent, should not be counted', goes the dictum.

Bangladesh's official reserve figure at present includes mainly three 'encumbered' items:

The Export Development Fund (foreign currency loans to incentivise exporters, worth $7 billion), a loan to the Payra Port project (this is in Euros, 524.5 million, roughly the same in dollars) and the $200 million currency swap with Sri Lanka.

Since these amounts have been paid out as loans, Bangladesh Bank prefers to record them as 'foreign assets', and counts the entire amount as part of the reserve, feeding the expectation that it will be fully recovered. Exporters however have been defaulting on the loans already, according to data from the 4 public sector banks through which the EDF was distributed.

Not counting those three items brings the reserve down to around $32 billion. This takes a month off the RIC (32/85 x 12 = 4.5).

Going by the 'What cannot be spent, should not be counted' rule, it would seem sensible to go with the IMF on this one. At the very least, you prepare for the worst, which would seem to be sound advice at the moment.

That means 4 months is probably the best estimate of our reserve at the moment, in months of import.

One or two economists are even quoting 3 months of reserve import cover. The likelihood here is that instead of calculating on the basis of the numbers we have to hand, such as the 2021-22 import figure, they are speculating that imports will keep rising in the next, i.e. current fiscal.

For the $32 billion reserve figure to cover just 3 months, annualised imports would have to comfortably hurdle $100 billion. And with the uncertainty prevailing in the world economy, especially the volatility in the vital energy market for Bangladesh, nothing can be taken off the table completely.