DETERMINANTS OF FOREIGN EXCHANGE RESERVES IN BANGLADESH: AN EMPIRICAL STUDY

This study examines the determinants of Bangladesh's foreign exchange reserves over the period 1972–2025 using the Autoregressive Distributed Lag (ARDL) approach. The bounds test indicates a long-run relationship among the variables, and the error correction term is negative and statistically significant at the 1 percent level, implying that about 31.9 percent of any deviation from the long-run equilibrium is corrected each year. In the short run, current-period increases in the current account balance, external debt stock, official development assistance, gross fixed capital formation, GDP per capita and inflation are associated with higher reserves, whereas domestic credit to the private sector, foreign direct investment, broad money and trade are associated with lower reserves. Lagged effects differ from current-period effects: the lagged value of domestic credit to the private sector is positively associated with reserves, while the lagged values of GDP per capita, inflation, broad money and trade are negatively associated with reserves. In the long run, the current account balance, external debt stock and trade are statistically significant at the 5 percent level, all with positive signs; the remaining variables, including remittances and the official exchange rate, are statistically insignificant. The results suggest that the current account position and external debt deserve particular attention when assessing reserve dynamics; the estimated associations should not be interpreted as causal effects.