Home ›› 25 May 2022 ›› Editorial
Currency exchange rates state how much taka can be exchanged for another currency. It's important to remember that many factors will impact exchange rates at any given time. Factors that can influence the exchange rates include interest rates, inflation rates, political and economic stability, government debt, trade deficits and currency demand. These factors affect the exchange rate at any given time.
A country's currency may be a free-floating or hard peg to another currency. The policy of Bangladesh is to follow a middle path of pegged exchange rate regime and interaction of demand and supply. Bangladeshi Taka is pegged to the US Dollar, and Bangladesh tries to keep the price level to the desired level. Like the interest rate, the exchange rate is also a tool for the central bank to regulate the economy and guide it in the right direction, so that inflation is controlled and employment is maximised.
Bangladesh Bank undertakes USD purchase or sale transactions with dealer banks at prevailing inter-bank exchange rates only as it thinks good to maintain orderly market conditions. Bangladesh Bank also fixed the inter-bank exchange and sale transactions with the government and different international organisations. Bangladesh Bank assigned the rate for importers—called BC rate or bills for collection rate—at Tk 86.75 on May 9, 2022. This rate assignment is impractical and has no connection with what is going on in the market. Importers had to buy dollars at as high a rate as Tk 95 to pay import bills.
The ongoing global economic crisis stemming from the coronavirus pandemic and Russia's invasion of Ukraine may not be over immediately. The volatility in the global market is intensifying since the Russia-Ukraine war shows no sign of abating. Because of rising coronavirus cases, China is under tremendous pressure. Inflationary pressures are intensifying globally.
Considering the ongoing volatile global scenario, which may continue for an uncertain period, should Bangladesh devalue Taka further to cope with the situation? Some people misconstrue the value of the currency and wrongly tie it with the strength of the government. Some people take this weakening of national currency as a sign of weakness in the economy, and even go as far as to blame the government for making the nation weaker on the global stage. It's the opposite for a developing country like Bangladesh.
Policymakers were proud of the foreign exchange reserves and projected it as an indicator of rapid development in Bangladesh. Early this year, when the government made plans to use our forex reserves to install a USD 370.96 million power transmission line from Payra seaport, the IMF and some economists warned that using forex reserves for such a project could undermine fiscal discipline. The government ignored the suggestion. The government could not predict a war that affected the economy, although Bangladesh is not a direct or indirect party to the war.
The global financial system is new volatile and affects all the countries' economies due to the Russia-Ukraine war and the reopening of the global economy after the Covid-19 pandemic. By this time, a new situation arises in Bangladesh. The forex reserve, recorded at $46 billion (4,600 crores) in December, declined to $41.95 billion (4,195 crores) within one month. The currency situation has been fluctuating due to some reasons. The government and the central bank have come up with some effective measures.
The global supply chain has been disrupted due to the Ukraine Russia war. The cost of imports has increased by about 46 per cent in the recent times due to an increase in shipping costs and a hike in commodity prices in the global market. On the other hand, Bangladesh's export income rose by 33 per cent. Still, overall imports jumped by 52.5 per cent in the first seven months of this fiscal year (FY) due to higher costs in imports of fuel oil and capital machinery. BB continuously sells dollars from its forex reserve to tackle the prevailing market crisis. As a result, the country's strong foreign currency base is falling gradually. Bangladesh has continued depreciating the taka against the US dollar but not at a similar pace to other countries. The central bank frequently sells dollars from the forex reserve to pay the import costs. Bangladesh has so far resisted calls for a major devaluation of its currency despite runaway imports amid higher food, energy, and raw materials prices globally. Data shows the central bank injected over $5 billion into the banking sector from August last year to May 11 (Wednesday) to meet the rising demand for the greenback.
The twin issues of war and the pandemic will linger. In addition, there are substantial overseas debt liabilities in the public and private sectors and import bill payment are responsible for declining foreign currency reserve. Sensing the probable crisis, most banks and importers are forward booking the dollar to mitigate the risk of foreign exchange rate volatility, another reason for the forex crisis. Forward booking is a means of mitigating the risk of foreign exchange rate volatility. The dollar price, as a result, has been on the rise in the local market.
BB has recently scaled up the cash margin for opening letter of credit (LC) to discourage imports and put a brake on dollar spending. The central bank has also toughened its rules for importing luxury and non-essential items such as sports utility vehicles, washing machines, air conditioners, and refrigerators. The importers now have to maintain a 75 per cent cash margin while opening LCs to import luxury cars and electronic home appliances.
The government has finally taken measures to safeguard our foreign currency reserves. The government has put its employees' foreign tours on hold. It has also deferred some of the development projects that require a lot of imports. Restricting the foreign trips of government officials is particularly a good idea, as it could save a lot of foreign currency. Reportedly, Tk 2,500 crore was saved in the past two years. During the pandemic, the government had put all foreign trips by its ministries and divisions on hold.
Taka has long remained artificially overvalued and thus deprived millions of remittance recipients since the dollar was undervalued.
Taka's value may rise or fall based on its market value, and the economy will either gain or lose at times. But keeping its value artificially too high is not a good decision. It will do more harm than good to the economy by damaging its balance of payments. Expatriate Bangladeshis will send their hard-earned money through the hundi channel, an illegal cross-border money transaction system, more if they do not get the desired rate from banks. So, providing a 2.5 per cent cash incentive to remitters will not bring any output due to the higher rate prevailing in the kerb market. Between July and April, migrant workers sent home $17.30 billion, down 16.2 per cent year-on-year, data from the BB showed. The government may offer a 2.5 percent higher dollar price and allow remitters to sell to the importers and other foreign currency users at the market price.
Since expatriates are gradually switching to hundi channels, remittance growth will likely stall further. So, the central bank will have to address the foreign exchange issue, keeping them in mind. The global situation is highly uncertain due to the unfortunate events in Russia- Ukraine. Bangladesh must devalue the currency to increase remittance and keep the export competitive to increase income from export to avoid any crisis of foreign currency.
The writer is a Legal Economist and Adviser, Bangladesh Competition Commission. He can be contacted at mssiddiqui2035@gmail.com
