US$ continues to reign supreme

The rate of US dollar against the local currency Taka keeps up an upward trajectory riding on an increasing import payment.

During the eight months of July-February of the current financial year, import expenditure increased by 46.70 per cent and export income by 29.8 per cent compared to the same period a year ago. In contrast, remittance income declined by 19.46 per cent during the same period.

The Bangladesh Bank on Wednesday further devalued the taka against the US dollar to tackle the pressure in the foreign exchange market created by the rising import payments.

The interbank exchange rate hit Tk 86.45 per dollar for the first time, up from Tk 86.2 on Tuesday.

But the real picture is completely different. A search of several state-owned banks on Thursday revealed that banks were charging traders between Tk 86.50 and Tk 93.40 per dollar for imports.

Banks are selling dollars to traders for at least Tk 7-8 higher than the inter-bank exchange rate of the Bangladesh Bank due to the increasing demand.

In this context, a trader said on condition of anonymity the banks are arbitrarily raising the price of dollar.

“I have never seen such a big difference with the official rate. Is there none to see this anomaly?” he posed a question.

Economists have advised the central bank to take immediate action, noting that such a large difference from the official rate is not desirable.

In addition, they have suggested reducing import demand, adjusting the exchange rate to keep pace with the market and lifting the cap on interest rates.

“We have enough dollars in stock and we are supplying whatever the bank wants, but if the difference in the actual rate is more than the official rate, then the central bank must look into it and take necessary action,” Md Serajul Islam, spokesperson of the Bangladesh Bank, told The Business Post,

Zahid Hussain, former lead economist of the World Bank Dhaka office, said the exchange rate has to be made in keeping with the view of reality.

“Traders’ allegation that the rate given by the central bank does not match the reality proves that there is a mismatch. However, the central bank should be careful about not creating any panic in the money market,” advised the seasoned economist.

Similar suggestions were given by Salehuddin Ahmed, former governor of the Bangladesh Bank.

He told The Business Post that there is usually a difference of Tk 2-3 in the market compared to the official rate. Since there is more difference, the central bank should look into it immediately.

Exchange rate should be allowed to increase reasonably

As the demand for US dollar has increased in the market, the exchange rate should be allowed to rise at a reasonable rate at the moment, Zahid Hossain said, adding that it can no longer be held artificially.

“This will reduce the cost of import a lot. Remittances and export earnings will also increase. Unnecessary imports will also be reduced due to higher prices,” he gave advices.

Salehuddin Ahmed said the government should check it out whether money is being smuggled under the guise of import.

“To this end, the Bangladesh Bank has to sit with the National Board of Revenue,” he suggested.

“You have to check the data of the customs to see how much money has been spent against how many products and whether the products have duly arrived in the country.”

In this context, Zahid Hossain said an increase in the exchange rate may put some pressure on inflation. Given the current situation, the exchange rate does not raise inflation. There are other reasons behind it.

“We have to accept that there will be some increases in inflation. In Bangladesh, however, the exchange rate is not the cause of inflation, market mismanagement, trader syndicates and low supply are said to be the reasons,” argued the economist.

“The government needs to rationally adjust the prices of fuel oil and gas to tame inflation and expand the coverage of social security programmes for the poor who will face problems due to inflation.”

Import demand must be reduced

The demand for dollar has risen as imports have risen. The government and the Bangladesh Bank have to pay more attention to reduce this demand, according to the experts.

Zahid Hossain thinks no other initiative will be useful in controlling the price of dollar without reducing the demand.

“It is not just Bangladesh that is in such a predicament, the countries whose economies depend on imports have this problem. Therefore, we have to pay more attention to the reduction in import demand.”

Salehuddin Ahmed echoed the same Zahid, saying the market demand cannot be met by selling dollars from the reserves. On the contrary, it could further reduce the reserves and put Bangladesh in danger.

“We have to take steps to reduce the demand instead,” he added.

To this end, efforts should be made to discourage the import of luxury goods. It remains to be seen whether the products being produced locally can be temporarily stopped from being imported.

Despite the continuous devaluation, the central bank sold $ 4.5 billion to banks in nearly nine months of this fiscal year due to the rising demand for the greenback. Also, it sold $ 521 million to banks in 24 days of this month. Besides, foreign exchange reserves stood at $ 44.22 billion as on April 27 which was $ 48 billion in August last year.

In a directive issued on April 11 to discourage imports, the Bangladesh Bank has issued directive to increase the minimum LC margin to 25 per cent except for fuel, essential food items, medicines and some other products.

In order to increase the inflow of foreign exchange in the country, the central bank has raised the investment ceiling by lowering the interest rate on dollar bonds through a directive issued on April 4.

Reserve wastage must stop, interest rates should go up

Economists believe that it is time to cut the waste of reserves and raise interest rates beyond 9 per cent in addition to discouraging imports.

Zahid Hossain said the waste of reserves must be stopped. As an example of waste, he said money has been provided from reserves for activities such as digging channels in the Payra seaport, buying aircraft and lending to Sri Lanka.

He cited that lending to the Maldives was also on the table.

At present, Bangladesh has only seven and a half months of reserves to meet the import expenditure, however, India has reserves to meet the cost of imports for 15 months, he mentioned, saying that India is not spending money like this from its reserves.

Salehuddin Ahmed argued that now is the time to lift the 9 per cent interest rate cap which will reduce the demand for loans by raising the interest rates slightly, which will also help in discouraging imports.

The private sector credit growth reached a 34-month high in March largely due to an escalating trend of import financing and increased economic activities centering Eid ul-Fitr.

In March, the sector credit growth accelerated to 11. 29 per cent, the highest since May 2019, when it was 12.16 per cent, as per the latest data from the Bangladesh Bank.